UNIT NINE (9)(A)

Licensing, Franchising, and

Other Contractual Strategies

Objectives

Contractual entry strategies

Licensing as an entry strategy

Advantages and disadvantages of licensing

Franchising as an entry strategy

Advantages and disadvantages of franchising

Other contractual entry strategies

Guidelines for protecting intellectual property

Foundation Concepts

• Contractual entry strategies in international business:

Entering a formal agreement with a distributor, joint

venture firm, or other partner abroad

- Often involves granting permission to a foreign

partner to use intellectual property

• Intellectual property

Ideas or works created by firms or individuals, such as

patents, trademarks, and copyrights

- Includes knowledge-based assets of the firm or

individuals such as industrial designs, trade secrets,

inventions, works of art, literature, & other “creations

of the mind”

Foundation Concepts

• 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

Two Types of Contractual Entry Strategies

Examples of Contractual Relationships

• Bristol-Myers Squibb entered a cross-licensing agreement

with IMCOR Pharmaceutical Co. to produce medications

for ultrasound patients. Pharmaceutical firms enter

countless such cross-licensing agreements

• Subway has over 38,000 stores in 90 countries around the

globe, often halal menus in Muslim countries, gluten-free

bread, and other customized variations

• 7-Eleven has some 37,000 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

Examples 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

Unique Aspects of Contractual Relationships

• Can be pursued independently or with other foreign

market entry strategies, such as FDI and exporting

• They provide dynamic, flexible choice

Firms can switch from a contractual approach to an

ownership-based approach (e.g., Coca-Cola)

• They allow the focal firm to blend in

Aligning with a local firm can blunt criticism and lessen

attention/criticism

• They generate a consistent level of earnings

They are less susceptible to volatility & risk

Aspects of Contractual Relationships (cont.)

• A patent provides the right to prevent others from using an

invention for a fixed period of time. It is granted to anyone

who invents a new process, product, or useful

improvement

• A trademark is a distinctive design or symbol that

identifies a product or service; e.g., Nike’s swoosh symbol

• A copyright protects original works of authorship; it

typically covers works of music, art, literature, movies, or

software

Typical Types of Intellectual Property

• An industrial design describes the features of a product &

improve look and usability (e.g., Apple iPod)

• Trade secret – confidential information that has

commercial value (e.g., formula for Coca-Cola)

• A collective mark – a logo that belongs to a group used to

identify them & marks the quality or accuracy of a product

(e.g., UL – Underwriter’s Laboratory)

• A geographical indicator – name or sign that denotes a

specific region/location (e.g., Florida oranges, Champagne,

etc.)

Types of Intellectual Property (cont.)

Intellectual Property Rights

• The legal claim through which the proprietary assets of

firms & individuals are protected from unauthorized use

by others

• Provide inventors with a monopoly advantage for a

specified period of time so they can use their inventions to

create commercial advantage

• Without legal protection & commercial rewards, firms

and individuals would have little incentive to invent

• Availability & enforcement of these rights vary

considerably across countries

Licensing

A licensing agreement specifies the nature of the

relationship between the licensor (owner of intellectual

property) and the licensee (the user).

Examples

Intel licensed the right to a new process for manufacturing

computer chips to German firm

Warner licenses Harry Potter images to companies

worldwide.

Disney licenses the right to use its cartoon characters in

producing shirts and hats to clothing manufacturers in Asia.

Licensing (cont.)

• Typically the licensee pays the licensor a fixed amount

upfront & an ongoing royalty (~ 2–5%) on gross sales

generated from using the licensed asset

• The fixed amount covers the licensor’s initial costs

of transferring the asset to the licensee, including training,

engineering, or modification

• Certain types of licensable assets, such as copyrights &

trademarks, have much lower transfer costs

• Typical contract runs from 5-7 years & is renewable

International Licensing is Fairly Common

• Planters and Sunkist are owned by U.S. firms and sold

in Britain and Japan via licensing agreements

• 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

• Swiss-based Nestle sells its Kit Kat chocolate bars in the

U.S. by license to Hershey

• A review of 120 of the largest multinational food

companies showed that half are involved in some form

of international product licensing

Trademark Licensing

• Granting to another firm to use proprietary names,

characters, or logos for a specified period of time in

exchange for a royalty

• Trademarks appear on clothing, food, toys, home

furnishings, and numerous other goods and services

- Coca Cola, Harley-Davidson, Polo, Disney

• Harry Potter trademark generates millions for the

owner, with little effort. U.S. firms trademark-licensing

revenues exceeding $100 billion annually.

Copyright Licensing

• A copyright gives the owner exclusive right to

reproduce art, music, literature, & software, as well as

to prepare derivative works, distribute copies, or

perform the work publicly

• The term of protection varies by country, but the

creator’s life plus 50 years is typical

• Many countries offer little or no copyright protection

• Thus, it is wise to investigate local copyright laws

before publishing a work abroad

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

• The licensor makes its patents, trade secrets, or other know-

how available to a licensee in exchange for a royalty

• The royalty may be a lump sum, a “running royalty” based

on the volume of products produced from the know-how,

or a combination of both

• Cross-licensing – acquisition of IP among firms in similar

industry; common in tech & pharma industries

Leading Licensors Ranked by Licensing Revenues

Licensing to the Licensor Advantages & Disadvantages

Franchising as an Entry Strategy

• Most typical arrangement is business format franchising -

a 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 longer-term than licensing

• Master franchiser: An independent company authorized to

establish, develop, and manage the entire franchising

network in its market

• E.g., McDonald's in Japan or India

Examples of Leading International Franchises

Franchising to the Franchisor Advantages & Disadvantages

Franchising to the Franchisee Advantages & Disadvantages

Managerial Guidelines for Licensing and Franchising

• Licensing and franchising are complex undertakings,

requiring skillful research, planning, and execution

• The firm must research in advance the host country's

laws on intellectual property rights, repatriation of

royalties, and contracting with local partners

• Key challenges include:

• Establishing which national law takes precedence for

the contract

• Deciding whether to grant an exclusive or nonexclusive

arrangement

• Determining the geographic scope of territory to be

granted to the foreign partner

• Finding right partner/developing local supply chains

Other Contractual Arrangements

• Turnkey contracting: Arrangement where a firm plans,

finances, organizes, and implements all phases of a

project abroad; handed over to a foreign country after

training local personnel. Typical in construction &

engineering industries

• Build-Operate-Transfer (BOT): a firm contracts to

build a major facility abroad (e.g., a dam), operates it for

a time, & then transfers ownership to the project sponsor

(e.g., host government)

Other Contractual Arrangements (cont.)

• Management contract: A contractor supplies managerial

know-how to operate a hotel, resort, airport, hospital, or

other facility in exchange for compensation

• International leasing: The lessor rents out machinery or

equipment to clients abroad, often for several years at a

time. E.g., airlines lease aircraft

Internationalization by Professional Service Firms

• Professional services (e.g., accounting, engineering, legal,

and IT) have grown globally over the last 3 decades

• Challenges include:

Need for recognition of credentials across borders

(e.g., CPA, Law, Medicine)

Need for employment visas

High need for language and cultural skills because of

strong involvement with service client

• Firms typically enter foreign market via

direct investment & contractual strategies

(e.g., agent or representative)

Counterfeiting

• Total value of counterfeit & pirated goods traded

internationally exceeds U.S. $600 billion (roughly 5% of

U.S. GDP)

• “Knockoffs” include clothing, fashion accessories,

watches, medicines, and appliances

• While companies such as Rolex, Louis Vuitton, & Tommy

Hilfiger are well-known victims, counterfeiting is

widespread even in industrial products

• Other examples are pharmaceutical products, medical

devices, and 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 for

Safeguarding Intellectual Property

• Understand local IP laws and enforcement levels

• Register IP in each country where firm does business

• Ensure that agreements provide for IP oversight

• Pursue IP infringers in court

• Monitor intermediaries and partners for infringements

• Require partners to report violations

• Use security systems for facilities & computer systems

• Include non-compete clauses in contracts

• Lobby local governments for enforcement