4.4.3 Impediments to the sale of know-how
Let's begin with the assertion that know-how, or expertise, is a source of competitive advantage. We can add a second assertion: the larger the market in which a product is sold, the greater the profits.
This suggests that we use exporting, licensing or FDI to sell know-how. However, we noted above that we might use licensing because transportation costs make exporting expensive. So, why not license and forget about FDI as a means of selling know-how? According to your textbook, there are three reasons - market imperfections - which may make licensing less attractive than FDI (see Figure 4.1):
- Licensing involves revealing your firm's secrets to the licensee. Patents may confer some protection against the exploitation of this knowledge, but there are dozens of ingenious schemes for thwarting patents. Once the secret is out, it is lost forever.
- Licensing implies loss of control. A licensing agreement may limit the actions of the licensee with respect to production, marketing and development strategy, but policing a licensing agreement can be both difficult and expensive, especially if it relates to abstract know-how (for example, computer software).
- Know-how is often not amenable to licensing. While business has many commonalities, the licensee, being from another culture, is unlikely to do business the way the licensor does it. This is well illustrated by the example in your textbook of Toyota , whose production skills are embedded in its corporate culture (Hill 2005, p. 226). This culture is not easily transferred to other countries.
Figure 4.1 Impediments to the sale of know-how
Source: Hill (1999, p. 187).
In summary, market imperfection theory suggests that horizontal FDI may be preferable to exporting if impediments to a firm's exports are too severe. As well, FDI may be preferable to licensing when:
- know-how cannot be adequately protected by a licensing agreement
- the firm wishes to retain tight control over a foreign entity
- the firm's expertise is not amenable to licensing.
Previous Page