Licensed production is the production under license of technology developed elsewhere. The licensee provides the licensor of a specific product with legal production rights, technical information, process technology, and any other proprietary components that cannot be sourced by the licensor. This is an especially prominent commercial practice in developing nations, which often approach licensed production as a starting point for indigenous industrial development. While licensed production in developing nations provides stimulus to the production and technical capabilities of local industry, in many cases it remains at least partly dependent on foreign support.
History
The four most common applications of licensed production have historically been automotive engines and parts, weaponry, aircraft, and pharmaceuticals. During World War I, it was more common for licensing agreements to take place between companies in the same country; for example, Opel was granted a license to produce BMW-designed aircraft engines for the German war effort. During the 1920s, European economists began advocating licensed production of foreign goods as the cure for "industrial particularism"—it allowed countries to bypass the costly research and development stage of acquiring products with which their own industries were unfamiliar, and refocus on the domestic manufacture of preexisting overseas designs. This allowed for a much higher rate of production, and was considerably cheaper than national sourcing and off-the-shelf acquisition. European automobile manufacturers were the first to adopt this practice, producing a number of specialized American components for their passenger cars under license. The United States not only supplied European factories with the necessary blueprints and licenses, but also sourced American-made tooling equipment accordingly, which allowed the automobile companies to optimize their production lines. By the 1960s it was not uncommon for an entire specialized industry—such as the manufacture of rotary aircraft in the United Kingdom—to be dependent wholly on foreign-licensed components. A number of countries began making improvements to foreign products manufactured under license, and were even able to re-export them successfully. This trend resulted in some technology suppliers imposing additional conditions on the licensee. The United States began inserting pro forma statements into licensing agreements known as "side letters", which required the free sharing of any improvements made to American technology. Other attempts were also made to control the destination of licensed products, particularly with regards to the arms industry. For instance, France stipulated that military vehicles manufactured in South Africa under a French license were not to be exported to other foreign nations without its express approval. Yet another form of common licensing restriction related solely to the licensing activity, regulating whether the specified product was fully produced or partly assembled, and whether entire products or their individual components were manufactured. The governments of Germany and Switzerland imposed similar restrictions on military vehicles manufactured in Argentina and Chile under license. In some cases, the original technology supplier did not need to manufacture the product itself—it merely patented a specific design, then sold the actual production rights to multiple clients. This resulted in different companies separately manufacturing identical products licensed from the same licensee. For many licensee companies, licensed production by other firms provides a continuous outlet for their proprietary technology, increasing their return on investment and prolonging the economic life of the product. Developing nations began accounting for a significant percentage of licensed production during the late twentieth century. Governments of developing nations often sought to encourage rapid industrialization, reduce dependence on foreign imports, and combat high levels of unemployment by creating and retaining local jobs. However, in many of these nations there was not a strong tradition of technology-based industrial development, and local firms were seldom active participants in creating indigenous technology through research and development. Since their research capacity was typically too limited to meet their goals, adopting licensing agreements for foreign technology was an especially attractive option. Manufacturing licensed products generated employment and empowered local industry while reducing dependence on imports. It also avoided the risks inherent in the development of new products by taking advantage of the proven reputation of products which had already achieved success in foreign markets. The economic life of many products, namely in the automotive and defense sectors, have been prolonged by overseas licensed production long after they were considered obsolete in their countries of origin. Developing nations such as Pakistan and Singapore which built important segments of their industry on licensed production have now themselves become licensors of technology and products to less developed states.
Theoretical basis
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