If your company is interested in delving further into the international trade arena, licensing, joint ventures and offshore operations should be explored. While direct exporting may be a profitable method of market entry for some businesses, licensing your company’s manufacturing rights to a foreign company or setting up a foreign manufacturing joint venture may be viable alternatives.

In comparison, setting up offshore manufacturing operations may be a more economical way of doing business. Firms choosing to set up operations in different countries should check for local incentives. Government agencies will usually assist foreign businesses to set up operations and will provide a wide range of grants and taxation incentives, both for the corporation and its expatriate employees.

This chapter will discuss the relative advantages and disadvantages of alternatives to direct exporting, how to find licensing and joint venture manufacturing partners, and how to finance overseas investment.

Strategic Alliances

Licensing

Licensing involves a contractual arrangement whereby a company licenses the rights to certain technological know-how, design and intellectual property to a foreign company in return for royalties or other kinds of payment.

Licensing offers a small business many advantages, such as rapid entry into foreign markets and virtually no capital requirements to establish manufacturing operations abroad. Returns are usually realized more quickly than for manufacturing ventures.

The disadvantages of licensing include a lack of control over manufacturing and marketing, and more importantly, that the licensee may become a competitor if too much knowledge and know-how is transferred. Take care to protect trademarks and intellectual property.

One way to help ensure that your intellectual property is protected is to secure proper patent and trademark registration. In the interim before your patent is filed, you may ask a potential licensee to sign a confidentiality and non-disclosure agreement barring the licensee from manufacturing the product itself, or having it manufactured through third parties. Make sure such agreements are not in violation of laws in the host country.

Patents should be filed with the appropriate foreign government within one year of U.S. filing, in order to obtain patent protection under the Paris Convention, the international agreement on patents. Patent rules vary from country to country, so it is important to consult a competent international patent and trademark attorney.

Licensing the rights to your product to a foreign company will require a carefully crafted licensing agreement. Consulting an attorney is critical since rules on licensing also vary from country to country. Be careful that the agreement does not violate host country antitrust laws. Under the antitrust laws of many countries, the licensee cannot set the price at which a product will be resold by the licensor.

Check with the United States Trade Representative’s Office (USTR – www.ustr.gov) for current information on intellectual property rights (IPR) protection in different foreign countries or refer to the Country Commercial Guides on the National Trade Data Bank (www.stat-usa.gov). In certain countries, USTR has applied a priority country label because of IPR violations. You may want to avoid licensing your company’s patents and trademarks to these countries.

Foreign Manufacturing Joint Ventures

In contrast to licensing arrangements, foreign manufacturing joint ventures allow for the U.S. company to have a stake and management role in the foreign operation. Joint ventures require more of a direct investment than licensing and require training, management assistance and technology transfer.

Joint ventures can be equity or non-equity partnerships. Equity joint ventures are contractual arrangements with equal partners. Non-equity ventures involve the host country partner in the arrangement with a greater percentage. In some countries, a joint venture is the only way for a foreign company to set up operations. Laws often require that a certain percentage of stock belong to a citizen of the host country.

Foreign manufacturing joint ventures are risky in that geographical and cultural factors may interfere with the smooth running of operations. You will have to deal with entirely new management, located in a different country, whose first language may not be English. Despite the drawbacks, using a foreign partner can have many benefits: the partner likely will have intimate knowledge of the target market and may have business and political contacts to make market entry easier.

Partner Selection Issues

Finding a suitable partner is critical to the success of any licensing or manufacturing joint venture arrangement. However, the selection process can be time-consuming and difficult without proper assistance. The United States government has developed a number of special programs to assist U.S. companies to select overseas partners.

The SBA-supported Unisphere Institute’s International Ventures Network partners U.S. high technology firms with firms throughout the world (www.unisphere.com). Unisphere, Inc. sources, assesses, develops and commercializes technologies. Unisphere serves as an independent third party that provides to clients the best possible advice and support in the field of technology commercialization by developing plans and assisting in the execution of plans for penetrating defense and commercial markets with cost-effective product solutions. Strong and stable firms are identified through Unisphere’s network of public and private trade promotion and economic development organizations in Europe, Asia and the Americas, to facilitate cross-border, high-tech ventures. Once specific venture opportunities are identified, Unisphere brings prospective partners face-to-face to define the venture.

The DOC Matchmaker Trade Delegations are an excellent way to make joint venture and licensee contacts. Matchmakers provide one-on-one, pre-screened business appointments, arranged by the United States & Foreign Commercial Service (US&FCS) (www.ita.doc.gov) overseas staff, for U.S. companies in a foreign country.

A number of Matchmaker Trade Delegations are held each year. For companies unable to take advantage of a specific Matchmaker, you may consider the DOC’s “Gold Key Service.” For U.S. firms planning to visit a country, US&FCS overseas staff will assist in developing a market strategy, setting up orientation briefings, making introductions to potential joint venture partners, providing interpreters for meetings and helping with follow-up planning. Fees vary from country to country.

To follow are several involved in foreign partner selection:

  1. Contact your local DOC office or U.S. Export Assistance Center (EAC). Discuss your target market and what kind of partner you are seeking. They can tell you whether a Matchmaker program fitting your needs is scheduled. If not, they will send your request to the appropriate FCS representative abroad.
  2. A list of potential partners will be forwarded to you. Contact each one with letter of introduction.
  3. After responses from potential candidates are obtained, conduct a financial and business reference check on the most qualified candidates. If you are unable to do this in-house, use a credit reporting firm.
  4. Make a trip abroad, either with a Matchmaker Trade Delegation or on your own, to meet with potential licensees or joint venture partners.
  5. Having made your final selection, begin contract negotiations with the assistance of legal counsel.

Foreign Investment Opportunities

Establishing a manufacturing facility abroad requires greater investment than licensing or joint venture manufacturing, but it also affords the greatest amount of control over operations. Additional factors may include foreign government investment incentives, the need to eliminate high transportation and tariff costs, and the desire to lower production costs.

If you are considering setting up an offshore manufacturing plant, you will need to assess whether or not to acquire an existing facility or to construct a new one. Key factors in this decision include legal and tax ramifications, location and how to finance the foreign investment.

Legal and Tax Implications

Much of the decision-making process surrounding joint ventures or offshore manufacturing involve legal and tax issues. Since some countries actively pursue foreign investment, they have relaxed their laws on the types and amount. In addition, they offer tax incentives. Consequently, U.S. and host country attorneys and accountants need be an integral part of the team to assess whether and where joint venture or offshore manufacturing would be most profitable.

Overseas Private Investment Corporation (OPIC)

Investing overseas requires a substantial commitment of a company’s time and money, and a certain amount of risk. To provide investment assistance and to address the risk insurance needs of U.S. companies, the U.S. government created OPIC, a separate business-oriented agency to support American investors entering the international marketplace. OPIC (www.opic.gov) is the lead agency assisting U.S. businesses interested in investment overseas. OPIC programs are available if the project:

  1. Is a new venture, or expansion of an existing business,
  2. Is located in a developing country where OPIC operates (OPIC operates in 140 countries),
  3. Will assist in the socioeconomic development of the host country,
  4. Is approved by the host government, and
  5. Is consistent with the economic interests of the United States and will not have a significant adverse effect on the U.S. economy or U.S. employment.

If your potential overseas investment fits these criteria, OPIC can be an extremely useful resource. OPIC offers a variety of programs, including financing and political risk insurance to help protect your investment and several pre-investment services.

Pre-investment Assistance

OPIC sponsors investment missions to introduce U.S. business men and women to key foreign private sector leaders, government officials and potential joint venture partners. Since 1971, OPIC has accomplished its developmental mission by supporting more than 3,100 projects throughout the developing world. Over the agency’s 32-year history, OPIC has supported nearly $145 billion worth of investments that have helped developing countries to generate over $11 billion in host-government revenues and create over 680,000 host-country jobs.

In addition to pre-investment assistance, OPIC provides financing to assist in the setup of overseas operations and risk insurance to mitigate some of the problems associated with investment in developing countries.

Financing

In July 2003, OPIC announced the establishment of a new department focusing on small and medium-size businesses. The Small and Medium Enterprise Department is responsible for OPIC’s Direct Loan program, which provides financing to U.S. businesses with annual revenues under $250 million. Other finance activities will be housed in a new Structured Finance Department, which will be responsible for the current Investment Guarantee program as well as special initiatives.

Insurance

Private investors may be hesitant to undertake long-term investments abroad, given the political uncertainties of many developing nations. To alleviate these concerns, OPIC insures U.S. investments against three major types of political risks: inconvertibility, expropriation and political violence, including civil strife.

Foreign Governments

Foreign governments, particularly in developing countries, often sponsor special agencies to aid and facilitate foreign direct investment. Some examples include the Mexican Investment Board (MIB), the Portuguese Trade Commission and the Bahrain Promotions and Marketing Board. These foreign investment promotion agencies can provide detailed market information, joint venture leads and make contacts with key officials. They often maintain offices in the United States.

Some countries also may have special funds or financing arrangements to spur foreign investment in particular sectors or geographical areas. Foreign investment promotion agencies can lead you to these sources. Contact the appropriate foreign embassy in the United States for the name of the agency that can assist you.

A Final Word on Going Global

How you decide to enter overseas markets will depend on a variety of factors unique to your own small business. Going global can be a challenging experience for a small business, but the rewards can be substantial. Let optimism and enthusiasm be your guide as you go global. The U.S. Small Business Administration, as well as numerous other government agencies at the state and federal level, support and encourage your entry into the international arena.

This chapter appeared in the book Breaking Into the Trade Game, 2004.
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John Manzella
About The Author John Manzella [Full Bio]
John Manzella is a world-recognized author and speaker on global business, emerging risks, competitive strategies and the latest economic trends. He also is founder of the ManzellaReport.com and Chief Strategy Officer of Ignition Life Solutions. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.




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