Licensed production

Licensed production refers to the local production under license of technology developed elsewhere. It 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 provides stimulus to the production and technical capabilities of local industry, in many cases it remains at least partly dependent on foreign support.

The three 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 which 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 helicopters in the United Kingdom—to be dependent wholly on licensed components.

A number of countries began improving 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 Eland armoured vehicles manufactured in South Africa under a French license were not to be exported to other foreign powers 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.

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