Contributions and Implications for Practice and Theory

The current research provides several insights that should

be of relevance to academics and managers. First, we high-

118 / Journal of Marketing, September 2013

TABLE 3 Dependent Variable: Royalty Rate

Variables

OLS Estimate (SE)

IPRP (H 1 )

–.95 (.45)*

Market size (H 2 )

.39 (.08)*

IPRP ¥ market size (H 3 )

UA ¥ market size (H 5 )

.44 (.35)

Contract duration (H 6 )

–.25 (.07)*

Exclusivity (H 7 )

–.70 (.18)*

Sales guarantee (H 8 )

.25 (.19)

Advance payment (H 9 )

.09 (.25)

Minimum payment (H 10 )

.44 (.17)*

Brand reputation

–.38 (.23)

Licensor capability

–.25 (.17)

Multiple country dummy

.05 (.16)

* p < .05.

FIGURE 2 Interaction Effect of IPRP and Market Size on Royalty Rate

Low IPRP High IPRP

Low market size High market size

Brand Licensing: What Drives Royalty Rates? / 119

light the importance of global brand licensing to marketers as a strategic tool. Given the higher economic growth rates in various countries outside the United States, many of them in emerging markets, marketers need to have a better understanding of this brand development strategy. As more firms are “born global” and have an immediate Internet presence available to consumers worldwide, the importance of expeditiously registering their IP (e.g., brands) abroad and using their brands in overseas markets to retain rights to the brand makes licensing a potentially much more relevant tool. This is even more important given that small firms with great brand potential may initially have fewer internal resources to develop their brands overseas. A new firm might opt to license its brand in strategic overseas markets to simultaneously build and protect its brand.

Second, we highlight the role of concerns about protect- ing the brand in brand licensing. Although the marketing field considers protection of brand assets important— indeed, Day (2011) suggests that it is a strategic imperative for marketers—academic research has not paid much attention to this issue. In this article, we explain brand protection more broadly, not only as involving a brand’s protection against mishandling by others but also as the need to safe- guard rights in foreign markets through active brand use. The failure to do so can result in brand owners needing to buy back their brand names in these markets, leading to unexpected delays and increased cost. We discuss brand protection as an underlying concern in the context of global brand licensing and explore its role in shaping royalty rate. Quelch (1985) observes that under certain circumstances, managers should be prepared to trade off revenue against the need to protect the brand. In this article, we discuss some conditions under which these circumstances may occur.

Third, we emphasize the role of IPRP in brand management. Although it is evident that the extent to which IP is protected in a market has a significant impact on a firm’s ability to prevent misuse of its property, the marketing literature has not provided much attention to this issue. We address this gap.

Fourth, this article examines how royalty rate varies across international markets on the basis of market characteristics. As we noted previously, efforts to explain such variation are rare, even in the more well-established related franchising literature. We hope that our preliminary effort in this regard spurs interest in this topic.

Fifth, although prior research has examined franchising, it differs from licensing in that the franchisor has much more control over the franchisee, which must adopt the franchisor’s business model completely. Brand licensing, in comparison, does not involve adoption of the business model and may span product categories and markets that are both familiar and unfamiliar to the licensor. Our article examines how licensors attempt to protect the brand through a business arrangement in which they have less control over the brand’s management.

Implications for Licensors and Licensees

The results show how brand licensors can use IPRP to assess the risk their brand faces in a global market, evaluate

the need for monitoring, and adjust royalty rates on the basis of such an assessment. Brand licensors can also gain insights into how market size can be used to negotiate higher royalty rates. Licensees can gain deeper understanding of licensor motivations, which will help them shape durable and more successful contracts. The results also provide information about the relationships between the various contract characteristics that influence royalty rates. Thus, firms may gain some insight into how various choices made in structuring brand licensing contracts can influence royalty rates. Overall, the study sheds light on factors that enable licensors and licensees to balance their interests in the context of brand licensing.

The findings are particularly useful to licensors, because they demonstrate how brand licensing may differ from technology licensing. In technology licensing, licensors offer low royalty rates as an incentive to limit licensee moral hazard when IPRP is low (Park and Lippoldt 2005). In brand licensing, our results show that the reverse may be the case: higher royalty rates prevail when IPRP is low because the risk to the brand and the accompanying costs of monitoring are greater. As one of the executives we inter- viewed noted, “If you lose control of things, you run the risk of diluting your brand,” referring to the need to care- fully monitor licensee activities in such markets. Higher costs of monitoring can arise in the case of brands because they can be more easily violated or misappropriated; in con- trast, technical expertise is required to copy a technology. Higher costs of monitoring a brand could also be a conse- quence of its longer life as an asset compared with the life of a technology patent. This result must be further clarified through direct testing of technology licensing and brand licensing contracts.

From our results, firms concerned with committing significant capital by entering markets with poor IPPR may consider entering these markets by licensing and “managing” their risk. Although these markets carry risk to a firm’s brands, if the risk is managed through greater monitoring supported by higher royalty rates, the benefits may out- weigh the risks. Brand managers, in this regard, might consider collaborating with corporate risk managers at their companies to build their foreign market entry strategies.

Implications for Theory

Our results show how licensors and licensees can protect their interests while structuring brand licensing contracts. From a theoretical perspective, the study illustrates the two- sided nature of agency issues in brand licensing agreements, particularly for international contracts. Although economics literature has addressed two-sided agency issues (e.g., Lafontaine 1992), these issues have not received much attention in the marketing literature. The two-sided agency formulation employed here shows situations in which the principal is not risk averse and in which both the principal and the agent take their relative risk into account while structuring agency contracts. A key contribution of this research is its extension of agency theory to a context in which the principal and agent interact to manage an intangible asset. In addition, the use of actual contract data to Our results show how licensors and licensees can protect their interests while structuring brand licensing contracts. From a theoretical perspective, the study illustrates the two- sided nature of agency issues in brand licensing agreements, particularly for international contracts. Although economics literature has addressed two-sided agency issues (e.g., Lafontaine 1992), these issues have not received much attention in the marketing literature. The two-sided agency formulation employed here shows situations in which the principal is not risk averse and in which both the principal and the agent take their relative risk into account while structuring agency contracts. A key contribution of this research is its extension of agency theory to a context in which the principal and agent interact to manage an intangible asset. In addition, the use of actual contract data to

This study emphasizes the need to protect marketing assets. Brand violation devalues the brand, compromises revenues, and reduces a marketer’s ability to fully leverage the equity of the brand (Day 2011). Therefore, the protection of brand property must be given importance in the dis- cussion of marketing assets. Relatedly, our results highlight concerns that arise in the management of intangible assets, which can be more easily misused. It is expensive and difficult to monitor these violations. As one licensing executive told us, “Dilution of the brand is the biggest risk [in licensing].” Importantly, although we do not directly test this, our findings imply that, in the context of licensing, not all intangible assets can be treated similarly. For example, brand assets may need more protection than technology assets because of their longer-term value and relative ease of violation. In an era of global brand management, when brand assets are often the most significant part of a firm’s value (Day 2011), it is important to evaluate strategies to protect such assets.

Limitations and Directions for Further Research

The study is based on cross-sectional data, which typically limits the ability to draw causal conclusions. However, this is not a critical issue in the context of this study, because our objective is to analyze the variation in royalty rate on the basis of market characteristics that influence risk percep- tions of both the licensor and the licensee. A cross-sectional comparison is more feasible in this context, especially because some of the country characteristics we consider do not change much over the relatively short time frames.

We could not obtain brand reputation measures for all brands in our data set from secondary sources. This led to our decision to use industry experts to rate the brands. The strong correlations of the expert assessment of brand reputation with archival measures of market share for those brands (where such measures were available) should allevi- ate concerns of the validity of this measure. Furthermore, we obtained multiple raters for nearly all the brands included in the study. Regardless, we did not offer hypotheses for the impact of brand reputation on royalty rate. We were also unable to obtain fine-grained measures for market sizes for specific brands in the country markets where they were licensed. Instead, we relied on GDP to assess market size. Not all the contracts were drawn up for operation in a single country. Although we tried to limit the data to contracts drawn for similar countries and used a dummy variable to rule out whether multicountry contracts had an effect on the results, it would be ideal to use only single- country contracts. These are issues that must be addressed in further research, especially given the relatively small sample size used in this study.

We did not find support for hypotheses regarding the influence of UA (H 4 –H 5 ), and it is possible that this result is due to weaknesses in the measure. We decided to use Hof- stede’s (1980) measure partly because the measures have repeatedly been subjected to replication and have typically

been found to have validity (Brock et al. 2008; Husted 1999; Shackleton and Ali 1990; Sondergaard 1994). How- ever, there is ample criticism of Hofstede’s measures, and using the index values at the country level may not have enabled us to adequately measure culture at the level of the individual respondent or firm. Further research exploring the impact of culture on licensing contracts would benefit from primary data from actual respondents rather than the use of an aggregate measure.

Using data from licensing contracts, we find evidence that supports a two-sided moral hazard argument based on agency theory. However, due to limited data availability, we could not examine the conditions under which different payment structures, such as fixed fees and royalty rates, are used. We had no contracts that employed a fixed fee payment in our data. However, there are contracts in other areas of licensing, such as technology licensing, that employ fixed-fee payment structures. Fixed payments are also more popular when licensed products are components in a system and individual sales for the licensed products are difficult to establish (Johnson 2001). It is also possible that competi- tiveness of the category and distribution channel structure could influence royalty rate because the licensee competes to stay financially viable. Further research is warranted here.

By collecting primary data, researchers can examine the relative impact of the motivation to protect the brand and enhance revenues on royalty rates. In this study, an underlying postulate is that the negative impact of IPRP on royalty rates is driven by the licensor’s desire to protect the brand. Although our findings lend credence to this assump- tion, a direct test of the relative roles of brand protection and revenue generation will help managers gain greater insights into the interplay between these two (sometimes conflicting) objectives in brand licensing. In addition, we suggest that royalty rates increase with market size because of the licensee’s desire to ensure support from the licensor.

A direct test of this premise through primary data will help shed further light on the incentive-alignment process that shapes brand licensing contracts. Finally, an assessment of the impact of licensor and licensee characteristics on moral hazard concerns through the collection of primary data will help confirm and extend the findings from this research.

From a public policy perspective, there is a concern that strong IPRP will shift income to IP-exporting countries and might affect the establishment of such regimes in a country (Maskus 2000). Notably, in this study, we find that higher IPRP benefits firms in the importer nation because the licensee is likely to receive a lower royalty rate. As such, brand licensees should retain more of their earnings when the IP regime in their country provides adequate protection to IP rights. A direct empirical assessment of this strategy should be of interest to public policy scholars.

Directly contrasting brand and technology licensing will also provide insights into how the nature of IP affects the appropriability of returns. The influence of IPRP on licensing may vary by product characteristics, particularly the content and boundaries of knowledge that is protected (Anand and Khanna 2000; Park and Lippoldt 2005). Although Park and Lippoldt (2005) demonstrate how different types of IP regulations influence revenues from IP, more

120 / Journal of Marketing, September 2013 120 / Journal of Marketing, September 2013

text. However, a deeper understanding of the nature of these Ambler (2003) notes that brand management involves

compromises and their contextual variations is required to trade-offs between leveraging the brand to enhance cash

provide brand managers with appropriate guidance in lever- flows and preventing the brand from dilution. This study

aging and sustaining their brand.

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Contributions and Implications for Practice and Theory