Which legal structure should a company use to take their technology to a new market - licensing, joint-venture or a wholly owned subsidiary?
The answer is subjective and depends on a number of critical factors.
The following illustration provides a decision-making construct that can help management arrive at not only the ideal structure, but also decide the direction and speed of travel along the continuum of complexity.
Although the above illustration only provides metrics across two dimensions, viz, Complexity of structure on the one axis and Level of investments & risks on the other, there is also a third dimension which is the Context. The context will have further have sub-dimensions, which include: Market, Technology-readiness and packaging, Commercialisation models, Management capacity and readiness, risk appetite and above all the global aspiration for that technology.
If the management wants the technology to be a global leader, then they have to traverse to the top right on the matrix illustrated above. Any aspiration that is lower than a strong market domination will need to adopt any of the lower order structures on the complexity/risk matrix.
The illustration outlines 7 structures with varying degrees of complexity, risks and investment commitments required to take technology to new markets. These are explained briefly below:
Level 0 - Exports
Best for commoditised technologies, that are just components or consumables, require low levels of technical sales or marketing and have an existing group of well identified buyers such as Original Equipment Manufacturers (OEMs).
Level 1 - Licensing / Distributorship
Best for technologies that require some degree of continuous market representation due to the size or importance of the market, but still low levels of technical sales that can be delivered by a qualified distributor who is granted the “sales license”.
Level 2 - Franchise
Best for solutions that required a high level of technical sales that requires specialist market knowledge. The Franchise structure provides a fair distribution of upside to both parties, where the franchisee benefits from a semi or fully exclusive right to distribute the product in market in lieu of their effort to gain market share, and the licensor gets a committed partner in country.
Level 3 - Strategic Partnerships
Best for solutions that need expanding a market-share or creating a new market-segment and where the two partnering entities bring play distinct but highly reliant roles. This structure warrants investments and specialist knowledge of both the licensor and the strategic partner entity. The structure gives confidence to both parties, that they indeed have to work together strategically to be able secure the revenues and profitability.
Level 4 - Joint Venture
Best for solutions that require significant investment to establish in-country production and/or delivery facilities. This structure is also relevant where new adaptation of intellectual property are required to cater to the regulatory standards, unique economics of the local market. The structure brings in best of both partners as they are establishing a new legal entity with different levels of equity stake in it based on their level of risk-participation and overall contribution being made.
Level 5 - Wholly-Owned Subsidiary
Best for solutions where the technology owner has adequate resources and risk bearing appetite to enter the new market. But this is also typically used by mature entities with strong balance sheets, experience of operating in multiple jurisdictions or those that want to keep the knowledge around technology IP guarded within the company confines.
Level 6 - Acquisition / Greenfield Development
This Level is an extension of Level 5, where companies have gained significant confidence of operating within markets, and are willing to risk significant capital in order to gain immediate market-share. For those entering directly with a greenfield development in a new country, such as OEMs, would have had to extensively study the market and industry dynamics in the proposed country before taking such a decision.
It is recommended that the organisation utilise the Technology Transfer – Decision Support System (TT-DSS) tool to help them making a decision on what is the right structure.
Levels 0-2: Want a light touch market-presence:
Companies that are aware that they will not have a direct in-market presence, but want a light-touch structure so as to introduce their technology, should aspire to have committed and well incentivised distributor(s) / licensees and provide them with adequate level of marketing support in the early stages of partnership to create market awareness.
Levels 3-6: How to decide what legal structure is appropriate for your organisation?
For those that have already made a decision secure a market-share for their technology, they can through a preliminary market readiness exercise, through Technology Readiness Level (TRL) and Commercialisation Readiness Level (CRL) scoring methodologies. A preliminary exercise will identify the gaps and how long a journey does the management need to make in order to have a significant presence in market.
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