Question

Q. Licensing, franchising, and management contracts are all forms of international business activity. Using examples, briefly define each form. What are the advantages and disadvantages of using these forms of activity?

Answer 1

The major entry modes for international market include –

1. Licensing – Licensing is when a firm leases the right to use its intellectual property which includes technology, patents, copyrights, trademarks, brand names, work methods etc. to another firm for a certain period of time in return for a fee called Licensing fee. The firm that leases the rights is called Licensor and the firm that acquires the rights is called Licensee. Examples of licensing is Calvin Klein which is actually a women's apparel manufacturer and licensed its brand name to innerwear, deoderants etc. Advantages include lower costs and higher revenues through licensing fee contracts. Disdvantages include possible compromise of brand image etc.
2. Franchising – Franchising is when a firm can provide the rights to use its name as well as its facility layout as well as intellectual property rights etc. to another firm which gains advantage of the parent firm. It is a kind of licensing where the franchisee firm will have greater control compared to licensing. There will be a franchisee fee involved. Examples of franchising includes McDonald's, KFC etc. Advantages include easier expansion of the firm's operations at higher revenues. Disadvantages include compromising of brand name and comparitively higher costs compared to licensing.
3. Management contracts - These include legal binding agreements between two businesses where one business grants operational control of a business initiative to other business. In international perspective, a global firm gets into contract with local firm in a country on a business. Examples include construction management contracts, property management contracts etc. Advantages include outsourcing of support operations while concentrating on core operations. Disadvantages include possible compromise on quality.