Paper on Licensing Proprietary Technology to Foreign Competitors

Licensing Proprietary Technology to Foreign Competitors

In today’s competitive and knowledge-based economy, many organizations are looking to capture additional value from their intellectual property by licensing to other companies including foreign competitors. Intellectual property, which comprises of patents, trademarks, maskworks, copyrights and trade secrets, are important assets to any organization (Fernandez and Neuenschwander n.p.). The outward transfer of a company’s intellectual property has increased prominence due to the recent trend of corporate strategy toward open innovation (Lichtenthaler et al n.p.). Organizations license their proprietary technology in order to gain sufficient returns on R&D.  Some companies license technology primary to achieve additional revenues. For instance, Dow Chemical and Hewlett-Packard generate numerous millions of dollars of annual royalties (Lichtenthaler et al n.p.). Other companies use this technique to primarily achieve strategic benefits. Licensing proprietary technology brings up a major issue: competitive advantage. Is licensing proprietary technology to foreign competitors the best way to give up a firm’s competitive advantage? This article comprehensively responds to this question.

The Pros of Licensing Proprietary Technology to Foreign Competitors

  • Firms that license their technology benefit from low-risk of capitalizing intellectual property assets. A company transfers the high cost of manufacturing and the risks of navigating through the technology to a licensee at a small investment.
  • By licensing out their technology, organizations get a chance to generate profits from unused portions of their intellectual property. Fernandez and Neuenschwander equate this concept to the process of converting potential energy to kinetic energy (n.p.).
  • Licensing proprietary technology allows a firm to penetrate new markets. The production and distribution of the technology to other population increases the company’s potential on foreign markets and helps to generate more profits.
  • Through varying degrees of liberty, the licensee can make inventions on the license in order to advertise itself better. This improvement makes the license technology more desirable.
  • An organization can achieve access to external knowledge through cross-licensing. Cross-licensing is a low-risk way of transferring intellectual property. It involves the transfer of rights of the property with no royalty payments required and instead, both parties work out a balancing payment.
  • Today’s environment has favored the advancement of intellectual property rights. Companies now actively mine their patents and follow their patented technology in the marketplace to determine any activities linked to it. In event of an infringement, the organization can either license the infringer or file a law suit right away.

(Fernandez and Neuenschwander n.p.).

The Cons of Licensing Proprietary Technology to Foreign Competitors

Despite the above potential benefits, there are substantial risks also involved in licensing technology.

  • When a company transfers its most valuable technology, its strategic position may be weakened by empowering potential competitors (Letto-Gillies 265).
  • By licensing its technology, an organization may lose direct control over its intellectual property, its quality and its manufacture.
  • Lastly, the firm’s worldwide reputation could be harmed in an event of poorly manufactured goods in one or two countries (Lett-Gillies 265).

How to Minimize Risks in Licensing

Before deciding to license technology, it is important for a company to establish whether it can develop the invention in-house. Subsequently, the firm should determine whether the time and cost of the invention are worth the anticipated returns (Fernandez and Neuenschwander n.p.). There are other alternatives a company can consider to profitably mobilize its intellectual property before settling for the architecture of licensing. These are strategic alliance, acquisition, joint venture, and new venture. The following are questions to consider when licensing in order to minimize risks.

Does the licensing strategy fit? – A company should observe the licensing program keenly to see if it will fit the overall business plan. Fernandez and Neuenschwander note that an efficient licensing program not only compliments but also enhances an organization’s product line and even strengthens its position in the market. They advise that if a company is licensing a standardized technology, it should avoid the manufacture and sale of the product in order to avoid competing with its licensees.

Can cross-licensing be used? – Cross-licensing will allow transfer of intellectual property without involving royalty payments. However, terms involving the ownership of the invention of the licensed technology should be clearly stated in the agreement.

Does the licensee have the required resources? – The licensor should first ensure that the licensee has the appropriate resources to advance the program since returns are expected from the investment (Fernandez and Neuenschwander n.p.).


The changing economy has motivated organizations to generate more value of their intellectual property through licensing proprietary technology to foreign competitors. However, through licensing, a company stands to either gain or lose its competitive advantage. By licensing technology, an organization benefits by transferring the costs and risks of manufacturing and sale of the product. The company penetrates new markets on the international scale and gains more profits from further production and distribution of its product to new populations. On the hand, licensing technology can easily weaken a company’s competitive advantage by strengthening a potential competitor. To avoid such an occurrence, the licensor can first determine whether the licensing program fits the overall business plan, whether the licensee has appropriate resources to carry on the technology and lastly, whether the program allows cross-licensing. From the above discussion, benefits of licensing proprietary technology to a foreign competitor outweigh risks. Therefore, licensing technology does not give up a company’s competitive advantage. However, it is advisable to keenly observe the nature and terms of the program in order to minimize risks.


Works Cited

Letto-Gillies, Grazia. “Global Business Strategy”. Business & Economics. Cengage Learning EMEA, 1996. pp. 265

Fernandez, Dennis and Neuenschwander, Charles, R. Strategic Licensing in the New Economy. n.p. n.d.

Lichtenthaler, Ulrich, Ernst, Holger and Conley, James. “How to Develop a Successful Technology Licensing Program”. Winter 2011. n.p. 14 Dec, 2010.