Licensing&Franchising Etal (1)

International Business: Strategy, Management, and the New Realities 1

International Business Strategy, Management & the New Realities

by

Cavusgil, Knight & Riesenberger

Chapter 15

Licensing, Franchising and other Contractual Strategies


Foundation Concepts

Cross-border contractual relationships: Entering a

formal agreement with a foreign distributor, joint

venture firm or other partner abroad. Often involves

granting permission to use intellectual property to a

foreign partner.

Intellectual property: Ideas or works created by firms

or individuals, such as patents, trademarks, and

copyrights. Includes such knowledge-based assets of

the firm or individuals as industrial designs, trade

secrets, inventions, works of art, literature, and other

‘creations of the mind’.


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: an arrangement in which the firm

allows another the right to use an entire business

system in exchange for fees, royalties or other

compensation.


Contractual Relationships are Fairly Common

• Pharmaceutical firms engage in cross-licensing

practices in which they exchange scientific knowledge

about producing products and distribution rights.

• Service firms in retailing, fast food, car rentals,

television programming, and animation rely on

licensing and franchising agreements.

• 7-Eleven is the world's largest chain of convenience

stores, with about 26,000 stores in 18 countries.

While the parent firm in Japan owns most of the

stores, several thousand in Canada, Mexico, and the

U.S. operate via licensing or franchising agreements.


Unique Aspects of Contractual Relationships

• Governed by a contract that provides the focal firm

moderate level of control over the foreign partner.

Control refers to the ability of the focal 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 and know-how.

• Can be pursued independently or in conjunction with

other foreign market entry strategies. Contractual

relationships may accompany and support FDI and

exporting.


Types of Intellectual Property

• A patent provides an inventor with the right to prevent others

from using, selling or importing an invention for a fixed period

– typically, up to 20 years. Can cover any new product,

process, machine, or improvement.

• A trademark is a distinctive design, symbol, logo, word, or

series of words placed on a product label, which identifies a

product or service as coming from a common source. E.g.,

British Petroleum’s ‘BP’ acronym, McDonald's golden arches,

Nike’s swoosh symbol.

• A copyright protects original works, giving the creator the

exclusive right to reproduce the work, display and perform it

publicly, and to authorize others to do these activities. Can

cover works from music, art, literature, films, and software.


Types of Intellectual Property (cont.)

• An industrial design refers to the appearance or features

of a product. The thin Apple iPod with the company logo is

a well-known example.

• A trade secret is confidential know-how or information that

has commercial value. Trade secrets include information

such as production methods, business plans, and customer

lists. For example, the formula to produce Coca-Cola is a

trade secret.

• A collective mark is a logo belonging to an association or

group whose members have given firms the right to use the

mark to identify the origin of a product or service. E.g.,

ILGWU is a collective mark for the members of

International Ladies Garment Workers Union.


Intellectual Property Rights

• The legal claim through which the proprietary

assets of firms and individuals are protected

from unauthorized use by other parties.

• Provide inventors with a monopoly advantage,

for a specified period of time, so they can exploit

their inventions and create commercial

advantage.

• Without legal protection and the assurance of

commercial rewards, most firms and individuals

would have little incentive to invent.


International Licensing is Fairly Common

• Peter Paul Mounds and Almond Joy are owned by the

British food firm Cadbury Schweppes and produced in

the U.S. via a licensing agreement with Hershey Inc.

• Planters, Sunkist, and Budweiser are owned by U.S.

firms and sold in Britain and Japan via licensing

agreements with local firms.

• Coca-Cola has a licensing agreement to distribute

Evian bottled water in the U.S. on behalf of the brand’s

owner, French company Danone.

• A review of 120 of the largest multinational food

companies revealed that at least half are involved in

some form of international product licensing.


Main Advantages and Disadvantages of Licensing

Advantages for licensor

• Low investment

• Low involvement

• Low effort, once license is established

• Low-cost initial entry strategy

Disadvantages for licensor

• Performance depends on the licensee

• Licensor has limited control over its asset(s) abroad

• Risks 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.

• More comprehensive and generally longer-term than

licensing.

• Master franchiser is an independent company

authorized to establish, develop, and manage the

entire franchising network in its market. E.g.,

McDonald's in Japan.


The Role of the Franchisor and the Franchisee

Franchisor:

• provides vital assets

• has economies of scale, a wealth of intellectual

property, and know-how about its own industry

Franchisee:

• performs local functions in foreign markets, such as

marketing and distribution, that the franchisor

usually cannot perform.

• has entrepreneurial drive, deep knowledge about

the local market and how to run a business there.


Other Contractual Arrangements

• Turnkey contracting: arrangement where a firm plans,

finances, organizes, manages, and implements all

phases of a project abroad, and hands it over to a

foreign country after training local personnel. Typical

firms in the construction, engineering, and architectural

services industries.

• Under a management contract, a contractor supplies

managerial know-how to operate a hotel, resort, hospital,

airport, or other facility, in exchange for compensation.

• With International leasing, the lessor rents out

machinery or equipment to clients abroad, often for

several years at a time. E.g., airlines lease aircraft.


Safeguarding Intellectual Property

• Contractual arrangements provide only moderate

control over foreign partners.

• Laws that govern contractual relations are often

insufficient abroad.

Thus, it is critical to:

• Have a strong contract;

• Develop close, trusting relationships with foreign

partners;

• Provide foreign partner with superior resources and

strong support.


Counterfeiting

• Total value of counterfeit and pirated goods traded

internationally exceeds U.S. $600 billion, which is

roughly 5% of U.S. GDP.

• Typical knockoffs include clothing, fashion

accessories, watches, medicines, and appliances.

• While companies such as Rolex, Louis Vuitton and

Tommy Hilfiger are well-known victims,

counterfeiting is widespread even in industrial

products.

• Other examples: pharmaceutical products, medical

devices car parts.


Guidelines for Protecting Intellectual Property

• Intellectual property laws are weak in many

countries.

• Key international treaties include:

Paris Convention for the Protection of IP

Berne Convention for the Protection of Literary and

Artistic Works

Rome Convention for the Protection of Performers

and Broadcasting Organizations

• The WTO created the Agreement on Trade

Related Aspects of Intellectual Property Rights

(TRIPS).


Guidelines (cont’d)

It is critical for the firm to:

• Understand local IP laws and enforcement procedures;

• Avoid countries with weak IP laws;

• Register patents, trademarks, copyrights in each country where the firm does business;

• Ensure that licensing and franchising agreements provide for IP oversight;

• Pursue IP infringers in court;

• Monitor franchisees, intermediaries and partners for asset infringements;

• Train employees to protect assets.

Licensing&Franchising Etal (1)

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