Agreement whereby an owner of a technological intellectual property (the licensor) allows another party (the licensee) to use, modify, and/or resell that property in exchange for a compensation (consideration).
The compensation may take the form of a
(1) lump sum royalty,
(2) royalty based on volume of production (called running royalty),
(3) right to use licensee’s technology (called cross licensing).
Through licensing of proprietary technology, small firms can earn substantial income from markets that they could not penetrate on their own, and large firms can have foreign affiliates without high financial and legal risks.