Licensing and Franchising
License or integrate?
License out knowledge or integrate
into production?
License in knowledge of integrate
into R&D?
Licensing vs. integration
Licensing contracts
• Technology package
• Use conditions
• Compensation
• Other provisions
Licensing or Integration?
Assets held by the MNE
hard to
sell/acquire
Hard to
assets Sell/
acquire
held
by
a local
firm
easy
to sell/
acquire
Equity Joint
Venture between
MNE
and local
firm
Whollyowned
subsidiary of
MNE
easy to
sell/acquire
Local firm
takes license/
franchise
from MNE
Determinants of the choice
Pros of licensing
• Comparative advantage
• Management costs
Cons of licensing
• Market transaction costs
• Risk of building up competitors
Costs of using the market for knowledge
Property rights in knowledge are imperfect
Right of exclusive use
Technical limitations
Government limitations
Right of free transfer
Contractual limitations
Government limitation
Limitations of market for
knowledge
Arrow’s paradox
The property rights solution
Property rights in knowledge
Patents
Protect inventions (products and
processes)
Copyrights
Protect form taken by literary,
musical, dramatic, pictorial, audio
and audiovisual work
Limitations of property rights in
knowledge
Right of exclusive use
Technical limitations
Knowledge tacitness
Legal limitations
Limited life
Imperfect enforcement
National domain
Effectiveness of Process and Product Patents In Industries
with Ten or More Survey Responses
Process patents
Industry
Pulp, paper, and paperboard
Cosmetics
Inorganic chemicals
Organic chemicals
Drugs
Plastic materials
Plastic products
Petroleum refining
Steel mill products
Pumps and pumping equipment
Motors, generators, and controls
Computers
Communications equipment
Semiconductors
Motor vehicle parts
Aircraft and parts
Measuring devices
Medical instruments
Full sample
Mean score on a scale of 1 to 7.
Product patents
Mean
Standard error
Mean
Standard error
2.6
2.9
4.6
4.1
4.9
4.6
3.2
4.9
3.5
3.2
2.7
3.3
3.1
3.2
3.7
3.1
3.6
3.2
3.5
0.3
0.3
0.4
0.3
0.3
0.3
0.3
0.4
0.7
0.4
0.3
0.4
0.3
0.4
0.4
0.5
0.3
0.4
0.06
3.3
4.1
5.2
6.1
6.5
5.4
4.9
4.3
5.1
4.4
3.5
3.4
3.6
4.5
4.5
3.8
3.9
4.7
4.3
0.4
0.4
0.3
0.2
0.1
0.3
0.3
0.4
0.6
0.5
0.5
0.4
0.3
0.4
0.4
0.4
0.3
0.4
0.07
Limitations of property rights in
knowledge
Right of free transfer
Contractual limitations
Legal limitations
Other barriers to imitation
•
•
•
•
Secrecy (trade secret)
Lead time (installed base)
Learning curve
Sales and service effort (customer
switching cost)
Effectiveness of Alternative Means of Protecting the Competitive
Advantages of New or Improved Processes and Products
Overall sample means
Distribution of industry
meansb
Processes
Products
Processes
Products
Patents to prevent duplication
3.52
(0.06)
4.33
(0.07)
2.6-4.0c
3.0-5.0c
Patents to secure royalty income
3.31
(0.06)
3.75
(0.07)
2.3-4.0c
2.7-4.8c
Secrecy
4.31
(0.07)
3.57
(0.06)
3.3-5.0
2.7-4.1
Lead time
5.11
(0.05)
5.41
(0.05)
4.3-5.9c
4.8-6.0c
Moving quickly down the learning
curve
5.02
(0.05)
5,09
(0.05)
4.5-5.7
4.4-5.8
Sales or service efforts
4.55
(0.07)
5.59
(0.05)
3.7-5.5
5.0-6.1
Method of appropriation
a
Range: 1 = not at all effective; 7 = very effective. Standard errors in parentheses.
b
From the upper bound of the lowest quintile of industries to the lower bound of the highest quintile.
c
Differences in means significant at the .01 level.
Patent or trade secret?
Trade secret if..
Infringement will not be detected (process)
Commercial life longer than that of patent
Patent makes it possible to design around it
Innovator cannot sue
Patent if..
Patent protects against design around it
Invention can be reverse-engineered
Company has high turnover of researchers
When to license?
• Target market factors
– Peripheral markets
• Firm factor
– Inexperienced firms
• Technology factors
–
–
–
–
Broad, upstream technology
Fast changing technology
Old technology
Cross-licensing
Licensing vs. equity as mode of
technology acquisition
• Licensing technology package skewed
towards older and more explicit technology
• Licensors unwilling to license advanced
technologies to potential competitors
Extent of technology package provided (119
agreements)
Licensing
Joint
ventures
Type of package
No.
%
No.
%
Comprehensive
Intermediate
Limited
Totals
4
25
44
73
5
34
60
100
24
17
5
46
52
37
11
100
Source: Davies
Provision of assistance with management
functions
Licensing
Joint
ventures
Function
No.
%
No.
%
Engineering and production
Management skills
Marketing information
Information on sources of
supply
73
10
14
100
14
19
45
16
19
98
35
41
16
22
20
44
Source: Davies
Franchising vs. Integration
• Reputation gained at home can be valuable
abroad
• Reputation can be embedded in a property
right (trade or service mark)
• Franchising is renting of trade or service
mark
Trademark
Protects
Trade name (distinctive, arbitrary, fanciful)
Service mark
Packaging and product features
color
sound
Must not have been taken by someone else
Must not be in common usage
Limitation of property rights in
reputation
• Right of exclusive use
– National regulations
– Enforcement problems (counterfeiting)
• Right of transfer
– Enforcement problems (free riding on quality)
Pirated Music CDs (percent of all sold) (2005)
Indonesia
China
Russia
Mexico
Greece
Brazil
Italy
Spain
0
20
40
60
Source: IFPI Piracy report, 2006
80
100
Source country of counterfeits seized in the
US 2002*, $m
China
Taiwan
Hong Kong
Pakistan
South Korea
Indonesia
0
Source: US Customs
10
20
30
40
* Year ending September
50
Price comparisons between fake products and
genuine articles in Hong Kong
Item
Genuine
Fake
Gucci glasses
$322
$11
Hermes wallet
$1,238
$15
Louis Vuitton black
‘epi’ leather
knapsack
$1,096
$45
Gucci watch
$915
$11
Gucci belt
$120
$28
Gucci pants
$1,096
$20
Gucci sandals
$322
$20
Potential problems of franchise
contracts
1. Franchisee will debase quality
Solution: QSC standards in contract
2. Franchisor will fail to enforce
Solution: Franchisor owns outlets
McDonalds franchise contract
Franchisee must have $75,000 in cash, securities and
investment besides home
McD chooses location of new outlets
No territorial protection
McD provides land and building, franchisee the rest
($400 to 600,000)
Franchisee pays $45,000 for 20 yr franchise +
17% fee on gross sales (13% rent + 4% service)
Franchisee must buy all food drink from approved
suppliers and respect QSC clauses of contract
McDonalds owned vs. franchised units, 1996
Owned units
Sales
Cash flow
Cash flow/
sales
Source: WSJ, 06/26/96
Franchised units
122,469
112,000
12,690
15,340
10.4
13.7
Company-owned outlets vs. Franchised
Outlets
Cost of supervising agents
Cost of
specifyin
g quality
by
contract
Low
High
Low
?
Franchising
High
company-owned
outlets
no transfer of
reputation
McDonald’s Menu Adaptation
•
•
•
•
•
•
•
•
•
•
•
Norway: McLaks, grilled salmon sandwich with dill sauce on a
whole-grain bun
Canada: Cheese vegetable, pepperoni and deluxe pizza
France: Wine
Uruguay: McHuevo, a hamburger with a poached egg on top,
and McQueso, a toasted cheese sandwich
Netherlands: Groenteburger, vegetable burger
Germany: Frankfurters, tortellini and a cold four-course meal
Greece and Italy: Salad bar
Thailand: Samurai Pork Burger, marinated with teriyaki sauce,
and palm-fruit sundae
Singapore: Vanilla ice cream swirled with chocolate and
strawberry and spiced for Singaporean tastes
Philipines: McSpaghetti, a sweet tomato and meat sauce with
frankfurter bits
Japan: Chicken Tatsuta sandwich, fried chicken spiced with
soy sauce and ginger served with cabbage and mustard
mayonaise
Pros and cons of franchising
Pros
Rapid expansion
Low management costs
Enlists local initiative
Cons
Free riding on quality
Limited profits