International Commercial Law Research
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The main purpose of the present study is to elaborate a theoretical framework for the development, manufacturing and promotion of a popular brand of clothing with a world-recognized trademark. To that end, the current study is conceived to compare and contrast the two basic forms of business – international licensing agreement and international joint venture – in which the manufacturing of the brand is possible.
To continue, the main task of the present study is to formulate a set of advices for the company which will help to make a proper decision and to elaborate an appropriate strategy for either the conclusion of an international licensing agreement or for the establishment of a joint venture and preparation of a report delineating the findings, comparisons and suggestions.
The report as a logical continuation and finalization of the preliminary research will cover all pertinent aspects of the study. Furthermore, it is expected that the report will achieve important research objectives. The objectives of the research must be enumerated as follows:
- To identify the core issues which need to be settled for each choice, propose solutions concerning further information to be collected;
- To delineate the principal contract clauses or auxiliary agreements which are necessary for every type of project, including but not reducing to those which are required to diminish risks and create predictability;
- To consider and evaluate relevant risks and management options in the legal framework in the developing host country, as well as any constraints or factors in the home country.
For the purposes of the current study, China has been chosen as the host country while the United Kingdom has been determined as the home country.
Definitions and Salient Features of International Licensing Agreement and International Joint Venture
Before making any suggestions on the superiority of one form of business cooperation over another, it is prudently to define the terms of international licensing agreement and international joint venture.
As far as the first term is concerned, Maryam Golestanian (n.d.) defines licensing agreement as an agreement ‘whereby a party called the licensor grants another party called the licensee the right to use its intellectual property rights such as patents, trademarks, or copyrights for a fee called a royalty’. Hence, it follows that, on the international level, licensing agreement regulates the rights and obligations of two parties, one of which has been created under the legislation of one country, whereas the other has been established under the law of another country. From the aforesaid definition, it is possible to make the conclusion that licensing agreement is a specific form of empowerment or, in other words, authorization to specific intellectual property rights of one business entity by other business entity. Also, it is visible that the conclusion of international licensing agreement does not lead to the creation of a new business entity.
In contrast to the licensing agreement, joint venture may be defined as a business agreement whereby parties consent to establish for a specified period of time, a new business entity and new assets by making capital contributions (Wilmerding 2005). The Black’s Law Dictionary (2009) provides the following definition of joint venture ‘a business undertaking by two or more persons engaged in a singly defined project’ (p. 915). Therefore, joint venture is a specific agreement between parties which results in the elaboration of a common project. The Black’s Law Dictionary (2009) provides the salient features of the joint ventures which help to discern them from other forms of business cooperation. First, it is clearly articulated that a joint venture exists because of an explicitly expressed or implied agreement. This means that the basis for joint venture is the agreement between its participants (founders).
Second, each joint venture seeks to achieve a common purpose which the participants intend to carry out by means of collaborative actions. This means that the participants of the joint venture have the same business aim, as opposed to the parties of the licensing agreement, which may have different business objectives and strategies. Third, every joint venture is based on the principle of shared profits and losses. This means that the participants of the joint venture share responsibility and gain dividends from their common business. In contrast to the joint venture, licensing agreements do not regulate sharing profits and losses between the parties.
Fourth, the joint venture is based on the principle that each member of it has an equal voice in controlling of the project. Thus, business decisions of a joint venture are made due to the majority of voices of its participants in respect of the issue in question.
Major Issues to be Taken into Account When Deciding on the Option – International Licensing Agreement or International Joint Venture
As the foregoing discussion must suggest, joint ventures are discrepant from licensing agreements. The proper choice between international licensing agreement and international joint venture is possible only through diligent consideration and evaluation of the specific characteristics of the two forms of international business relations. Thus, contracting parties should reflect on the question whether their cooperation will be strategic or situational (Bamford et al. 2002).
Thus, Maryam Golestanian (n.d.) assays that the conclusion of international licensing agreement provides the licensor with the possibility to expand its market and participate in business processes within the licensee’s country without putting any capital. However, such possibility does not make the relationships between licensor and licensee strategic.
On the other hand, international joint venture as a cross-border business entity provides furtherance for different business entities to establish and sustain strategic alliances (Rosenbloom et al. 2002; Wolf 2000). In other words, joint ventures allow partnering business entities to gain competitive advantages by means of access to each partner’s resources, market, technologies and human resources.
Furthermore, these strategic benefits of international joint ventures are compensated by the requirement to involve large sums of capital and other resources (Datta 1988). In this sense, the partnering parties must decide whether they need strategic alliance in the form of international joint venture and whether they are capable to spend funds on the sustenance of the alliance. Alternatively, the parties may have recourse to a less expensive and less integrative form of business relations as international licensing agreement.
Apart from the cheapness of business relations, international licensing agreements leads to cheaper labor, less hierarchical administration, easier procedures of capital investment and fewer risks. Alternatively, joint ventures provide larger production space and more guarantees protecting the business from nationalization (Kogut 1988).
Compare and Contrast of the Key Clauses and Ancillary Agreements of International Licensing Agreement and Joint Venture
Both international licensing agreement and international joint venture rest on specific clauses and ancillary provisions. As far as the former is concerned, the particular provisions of the agreements include limitations, royalties, licensor’s interest, licensee’s interest, etc (Golestanian n.d.). According to Golestanian (n.d.), the part «Limitations’ must regulate geographic area within which the application of the agreement is limited. Thus, if the licensor is a British company, and the licensee is represented by a Chinese business entity, then the international licensing agreement must indicate on the validity of the agreement in the territory of China only» (Osland & Cavusgil 1996, pp. 106-130).
To proceed further, international licensing agreement must specify the level of royalty to be paid by the licensee to the licensor. The parties may choose between fixed amounts of royalty to be transferred in advance, or it can be a percentage of sales (Golestanian n.d.). Besides, Santiago Cueto (2010) contends that the payment of royalty from a foreign licensee can be a very complicated thing as the licensor must take into account currency conversion rates, ways of payment, taxes etc.
In addition to the clauses specified by Golestanian (n.d.), Cueto (2010) claims that every international licensing agreement should also include such provisions as the approval of licensed goods, jurisdiction, choice of law, arbitration, and foreign registrations. In respect of approval of licensed goods, the author writes that the text of an international licensing agreement must contain provisions concerning the right of the licensor to arrange periodic examinations of the licensee’s manufacturing facilities to guarantee the quality of goods.
Also, Cueto (2010) deems it wise to incorporate into the text of an international licensing agreement the jurisdiction and choice of law. This is a very useful proposition in view of the fact that the United Kingdom and China, for instance, have different legal systems. Thus, the parties of an international licensing agreement should decide what law will regulate their contracts.
Similarly, the incorporation of an arbitration clause into the international licensing agreement will help to avoid unnecessary costs, predicaments and complexities which may occur on the road of dispute settlement between the licensor and licensee.
After the main clauses and auxiliary agreements of the international licensing agreement have been analyzed, it is the right time to compare them with the main clauses and ancillary provisions of international joint venture. Thus, Milton Stewart and Ryan Maughn (2011) point out that international joint venture usually rests on several agreements, whereas international licensing agreement may exist in the form of one document. According to the authors, the elaboration of international joint venture should start with drafting a term sheet, ‘an agreement in principle or a memorandum of understanding’ (Stewart & Maughn 2011). Assuredly, the term list may also be incorporated into an international licensing agreement. It is prudently to define all terms of the licensing in order to facilitate both exercise of the agreement and to prevent possible disputes between the licensor and licensee.
In contradistinction with international licensing agreement in which all clauses and conditions are usually described in one document, the architecture of joint venture is usually delineated in the preliminary agreement which assures that all of the salient legal and business issues are discussed and consented by the parties before the final agreement is drafted (Stewart & Maughn 2011). The final agreement of joint venture usually deals with the following issues: 1) management; 2) governance; 3) contribution of partners; 4) alternative dispute resolution provisions and deadlock provisions; 5) regulatory issues; 6) governing law; 7) ownership transfer; 8) termination provisions; 9) governing language; 10) non-competition, non-disclosure, non-disparagement and non-solicitation provisions; 11) intellectual property provisions.
The research shows that some clauses or supplementary agreements of joint venture are similar to those in international licensing agreement. For example, both international joint venture and international licensing agreement contain the clauses about management and governance, jurisdiction and alternative dispute resolution clause, regulatory issues, termination provisions, intellectual property provisions. Nevertheless, the agreement of establishing a joint venture is more complex and detailed than regulating international licensing issues. Thus, joint venture has a more hierarchical and complicated system of governance and management which is prescribed by one or several agreements. Contrariwise, international licensing agreement contains much simpler conditions concerning the governance and management. Also, agreements regulating joint venture always contain provisions concerning ownership transfer, whereas international licensing agreement may be concluded without any obligation respecting ownership transfer matters.
As far as the matter of management is concerned, it is critical for the founders of international joint venture to choose senior management as soon as possible. Also, the scholars are prone to believe that senior management should have a clearly defined charter and authority. The same recommendations are made in respect of governance. In contrast to international licensing agreement, the governance of joint venture should be carefully considered and specified in details. The system of governance in joint venture is much more complex than that under international licensing agreement and thus requires a more profound deliberation.
Relative contributions of partners, as well as allocation of risks and hazards, comprise other two characteristic parts of agreements establishing a joint venture. Some authors deem it wise to determine relative contributions of partners as a separate ancillary agreement of joint venture, which delineates the correspondent contributions of the participants to their common venture, both material and immaterial. Likewise, the clauses of allocation of risks and rewards intrinsic to joint venture substantially differ from those of international licensing agreement. The question of rewards in terms of international licensing agreement is reduced to the meaning of royalties, whereas the question of rewards in the context of international joint venture encompasses such issues as dividend distributions, capital calls and allocations of losses.
Also, it should be differentiated between regulatory issues of joint venture and regulatory issues of international licensing agreement. Aside from the questions of export and import controls, regulatory issues of joint venture embrace compliances with foreign corrupt practices act, companies’ acts, as well as compliance with anti-trust laws. On the other hand, the regulatory issues of international licensing agreement may be reduced to the approval of licensed goods.
In the final analysis, it should be generalized that joint venture is much more complex form of international business partnership which is based on several agreements and documents. On the contrary, international licensing agreement is a simpler form of international business relationships which requires less integration, less governance and less control.
Compare and Contrast of Major Risks and Management Options of International Licensing Agreement and Joint Venture
According to Jennifer Van Barren (n.d.), all risks stemming from the conclusion and exercise of international licensing agreement may be logically divided into risks of licensor and risks of licensee. The first group of risks is connected with the potential hazards of losing control over the production and marketing of goods. Another potential risk of licensor occurs when the licensing agreement ceases and the licensee go on selling similar products under different trade mark and without paying the licensor any share from the sales.
Besides, risks of licensor may also be associated with cultural and language barriers and handicaps, political instabilities and currency fluctuations (Meirovich 2010). This group of hazards can excellently be demonstrated in the case when the licensor in a business entity from the UK and the licensee is a business entity from China. The United Kingdom and China have apparent distinctions in culture, language, currency and political system.
To elaborate further, the risks of licensee also emerge when a foreign business entity enters an international licensing agreement. The fact is that the licensee makes certain investment into manufacturing facilities and puts its capital at risk. Furthermore, the licensee encounters the hazards relating to the handling of the goods, their delivery and sale. In the ultimate analysis, the licensor may directly experience the risks of expropriation, nationalization, or confiscation. The term nationalization means that a special decree takes place to bring within state ownership a general class of property or even an entire sector of the economy. On the other hand, expropriation implies a special takeover decree which is used against a particular foreign business entity.
In summary, the establishment of an international licensing agreement afflicts both licensor and licensee with risks. In contrast to international licensing agreement, the establishment and functioning of joint ventures are connected with a larger number of hazards. Thus, the lack of adequate planning and roper strategy may lead to the ultimate failure of the joint venture. The participants of joint venture must always monitor such factors as technologies, marketplace developments, political and economical uncertainties and downturns in order to anticipate their effects on international joint venture (Parkhe 1996).
Hence, it follows that the establishment and functioning of international joint ventures are connected not only with risks of participants, but also with the risks of joint venture itself. Furthermore, joint venture and its participants are sensible to financial risks. Thus, the nature of joint venture as a partnership lies on the fact that profits originate from joint venture and are subsequently distributed among its members (Prescott, and Swartz 2010).
The lack of proficient management and control may cause problems of the allocation and distribution of profits. Joint venture must always maintain an up-to-date system of management in order to respond effectively and successfully to menaces and disputes (Steensma 2008). Hazards may occur when personal expectations and philosophies of partners dissent from strategies of managers. In such cases, joint venture may lose its flexibility.
Also, some risks are derived from the nature of joint venture as an unstable business entity (Vaidya 2009). As the matter of fact, joint ventures are frequently difficult to capitalize, especially in relation to debt because it is finite in its term of existence and thus lacks permanence (Valdes & Garcia-Canal 1998). Finally, international joint venture may experience the hazard of the creation of a potential competitor in the form of one’s own partner of joint venture. This risk may be eliminated if the provisions of non-competition, non-solicitation and confidentiality are incorporated in the agreements of establishing a joint venture.
After everything has been given due consideration, it should be generalized that international licensing agreement and international joint venture are two discrepant forms of international business partnership. Both international licensing agreements and joint ventures are used to give legal authority to a party in order to participate in a specific activity. There is no visible superiority of international licensing agreements over international joint venture and vice versa. However, if the UK manufacturer of a popular brand of clothing with a world-recognized trademark seeks to seriously conquer markets of China, it is better for the owner of the brand to establish a strategic partnership with a Chinese company (companies) in the form of international joint venture.
Alternatively, if the UK owner of a popular brand of clothing is not confident concerning the perspectives of doing business in China, it is better for him to participate in the international licensing agreement as a licensor.
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