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Licensing propriety technology to foreign competitors is the best way to give up a firm's competitive...

Licensing propriety technology to foreign competitors is the best way to give up a firm's competitive advantage. (a) Discuss the above statement (b) What alternative entry form might you consider if you are a technology company? Why?

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Expert Solution

1. Licensing propriety technology is one of the ways in which firms decide to expand markets globally. In this method, the firm (licensor) gives the right of using a technology developed by the firm to other foreign entities( licensee). In return, the firm earns by getting a royalty fee from foreign companies. But the above may have its own dangers -  

  • Loss of competitive advantage - if a technology firm gives up its foundational technoloies to foreign countries, it might as well be other players over there learn the technical aspects of the products and hence the firm loses its dominance.
  • Legal and political issues - if the foreign country's political situation becomes unfavourable the terms of the deal might not stand and the firm loses its negotiation upper hand.

But there are advantages as well -

  • Increased revenue - the firms get one additional source of revenue from foreign markets
  • Low risk - Firms are willing to license proprietary tech because it allows them to explore foreign markets without the risks and costs associated with settling over there.

Hence we see that licensing proprietary technology has its own advantages and disadvantages. A firm should therefore only look to license a part of its entire technological product line. In this way, the firm may increase its market scope without giving up its competitive advantage.

2. Alternative forms of entry for technology companies might be -

  • Joint Ventures - here two or more firms contribute equally in the process. Hence a lot of stakes are involved for both of them and at the same time, the risk reduces.
  • Technological FDI - this usually takes place in developing countries. The firms over there at times get subsidies by the government as well as a fresh and unexplored market to expand into.
  • Trading - in this method developing or labour intensive countries import the technology from foreign countries which they then analyze and try to copy.

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