Chapter 15
Licensing, Franchising and
other Contractual Strategies
International Business
Strategy, Management & the New Realities
by
Cavusgil, Knight & Riesenberger
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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’.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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).
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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.
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