Licensing, Franchising, and Other Contractual Strategies
Two Types of Contractual Relationships
Licensing: An arrangement in which the owner of intellectual property grants another firm the right to use that property for a specified period of time in exchange for royalties or other compensation.
Franchising: Arrangement in which the firm allows another the right to use an entire business system in exchange for fees, royalties or other compensation.
Royalty: A fee paid periodically to compensate a licensor for the temporary use of its intellectual property, often based on a percentage of gross sales generated from the use of the licensed asset.
Typical Types of Intellectual Property
Unique Aspects of Contractual Relationships
Governed by a contract that provides the focal firm a moderate level of control over the foreign partner. Control reflects the ability of the firm to influence the decisions, operations, and strategic resources of a foreign venture.
Typically involve exchange of intangibles (intellectual property) and services. Examples include technical assistance, know-how, and trademarks.
Can be pursued independently or with other foreign market entry strategies, such as FDI and exporting.
trademark
copyright
patent
Intellectual Property Rights
The legal claim through which the proprietary assets of firms and individuals are protected from unauthorized use by other parties.
Licensing
A licensing agreement specifies the nature of the relationship between the licensor (owner of intellectual property) and the licensee (the user).
Trademark Licensing
Involves a firm granting another firm permission to use its proprietary names, characters, or logos for a specified period of time in exchange for a royalty.
Copyright Licensing
A copyright gives the owner the exclusive right to reproduce art, music, literature, software, and other such works, as well as prepare derivative works, distribute copies or perform or display the work publicly.
Know-How Licensing
Involves a contract in which the focal firm provides technological or management knowledge about how to design, manufacture, or deliver a product or a service.
Main Advantages and Disadvantages of Licensing
Advantages for licensor ✅:
Low investment
Low involvement
Low effort, once established
Low-cost initial entry strategy
Disadvantages for licensor ❎
Performance depends on the foreign licensee
Licensor has limited control over its asset(s) abroad
Runs the risk of creating a future competitor
Franchising
Most typical arrangement is business format franchising, in which franchisor transfers to the franchisee a total business method – including production and marketing methods, sales systems, procedures, training, and the use of its name.
Master franchiser
An independent company authorized to establish, develop, and manage the entire franchising network in its market. E.g., McDonald's in Japan.
Advantages for franchiser ✅
Low investment;
Can internationalize quickly to many markets;
Low effort, once established; and
Can leverage franchisees’ local knowledge.
Disadvantages for franchiser ❎
Maintaining control over franchisees may be difficult;
Franchiser has limited control over its assets abroad; and
Risks creating a future competitor