International Business Expansion: Licensing, Franchising, and Joint Ventures
Licensing
An agreement where a domestic company makes available its intangible asset(s) to a foreign company.
Advantages for the Licensor
- Low-cost entry mode
- Speed of market entry
- Avoidance of many tariff and non-tariff barriers
- Extra income from technology already used in the domestic market
- Avoidance of political risk
Advantages for the Licensee
- Immediate access to know-how, avoiding research and development costs
- Acquisition of an internationally recognized brand name
- Low-cost venture for a company willing to set up a factory
Conditions
- Can only be an option for an exporter if the company possesses technology, trademarks, or a company name that is attractive to potential foreign users.
- The company must secure legal protection of its industrial property rights.
Disadvantages
- Creating a future competitor in a foreign market
- High commercial risk
Franchising
A form of licensing in which a company (franchisor) licenses a business system as well as other property rights to an independent company or person (franchisee).
Differences from Licensing
- A franchise involves a business system
- It is highly standardized
Advantages for the Franchisor
- Low-cost entry mode
- Speed of market entry
- Avoidance of many tariff and non-tariff barriers
- Extra income from a business system already used in the domestic market
- Low political risk
Advantages for the Franchisee
- Great opportunity for entrepreneurs: immediate access to a successful business
- Acquisition of an internationally recognized brand name
- All policies and procedures already established
- Marketing support from the franchisor
Disadvantages
- Creating a potential future competitor
Industrial Franchise
Transfers to the franchisee the manufacturing of branded products. The franchisor supplies its brand, reputation, know-how, quality control, financial expertise, and marketing management. The franchisee finances the production, distribution, and marketing of the products.
Commercial Franchise
The franchisor transfers to the franchisee the sale and distribution of branded products or services. This includes the right to sell products or services in a defined area under the franchisor’s image, brand, name, etc. It also includes commercial know-how and technical assistance.
Joint Venture
An agreement between two companies (the exporter and a company from the target country) forming a new company to market and/or manufacture or produce goods on a joint basis in the target country.
Reasons for Joint Ventures
- Prohibition or discouragement of sole-venture entry by governments in some countries
- Need for a special contribution from a local partner to distribute products in a complex market
- High risk associated with manufacturing products in the foreign country
- Lack of sufficient capital to manufacture products in the foreign country
- Opportunity to complement products, develop new products, create synergies, or achieve economies of scale with a similar company in the foreign country
- Desire to acquire new skills or technology
Potential Problems with Joint Ventures
Control (veto right), cultural gaps, different objectives, distance from parent companies, paralysis, product quality, lack of communication, and profit distribution.