International Business: The New Realities

Fourth Edition

Chapter 15
Licensing, Franchising, and
Other Contractual
Strategies

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Learning Objectives
15.1 Explain contractual entry strategies.
15.2 Understand licensing as an entry strategy.
15.3 Describe the advantages and disadvantages of licensing.
15.4 Understand franchising as an entry strategy.
15.5 Explain the advantages and disadvantages of franchising.
15.6 Understand other contractual entry strategies.
15.7 Understand infringement of intellectual property, a global
problem.

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Foundation Concepts
• Contractual entry strategies in international
business: Cross-border exchanges in which the
relationship between the focal firm and its foreign partner
is governed by an explicit contract.
• 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: Arrangement in which the firm allows
another the right to use an entire business system in
exchange for fees, royalties or other compensation.
• Royalty: A fee paid periodically to compensate a licensor
for the temporary use of its intellectual property, often
based on a percentage of gross sales generated from the
use of the licensed asset.

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Examples of Contractual Relationships
• Bristol-Myers Squibb entered a cross-licensing
agreement with IMCOR Pharmaceutical Co. to produce
medications for ultrasound patents. Pharmaceutical
firms enter countless such cross-licensing agreements.
• Japanese company Sanrio has licensed “Hello Kitty” to
many manufacturers of cosmetics, food, calendars, toys,
clothing, and numerous other products.
• 7-Eleven has some 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 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.
• Can be pursued independently or with other foreign
market entry strategies, such as FDI and exporting.

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Contractual Relationships
• Provide dynamic, flexible choice, where firms may use
contractual agreements to make their initial entry in
foreign markets. Then, as conditions evolve, they switch
to another entry strategy, such as FDI.
• Can reduce perceptions of the firm as a foreign
enterprise. A contractual relationship with a local firm
facilitates blending into the local market.
• Generate a consistent earnings from foreign operations,
compared with FDI, as contractual arrangements are less
susceptible to volatility and risk.

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Typical Types of Intellectual Property (1 of 2)
• A patent provides the right to prevent others from using
an invention for a fixed period. 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.
Typically covers works of music, art, literature, movies, or
software.

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Typical Types of Intellectual Property (2 of 2)

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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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Licensing (1 of 2)
• 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 a firm in Germany.
• Warner licenses images from the Harry Potter books and
movies to companies worldwide.
• Disney licenses the right to use its cartoon characters in
producing shirts and hats to clothing manufacturers in Asia.

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Licensing (2 of 2)
• In a typical deal, the licensee pays the licensor a fixed
amount upfront and an ongoing royalty (usually 2-5%) on
gross sales generated from
using the licensed asset.
• The fixed amount covers the licensor’s initial costs
of transferring the licensed asset to the licensee,
including training, engineering, or adaptation.
• Certain types of licensable assets, such as copyrights
and trademarks, have much lower transfer costs.

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Licensing as a Foreign Market Entry
Strategy

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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.
• 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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Trademark Licensing (1 of 2)
• Involves a firm granting another firm permission to use its
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.
E.g., Coca Cola, Harley-Davidson, Laura Ashley,
Disney, Michael Jordan, and your favorite university!
• A trademark like Harry Potter generates millions for the
owner, with little effort. U.S. firms derive trademark-
licensing revenues exceeding $100 billion annually.

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Trademark Licensing (2 of 2)

Source: Malcolm Fairman/Alamy

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Copyright Licensing
• A copyright gives the owner the exclusive right to
reproduce art, music, literature, software, and other such
works, as well as prepare derivative works, distribute
copies, or perform or display 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.

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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.

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Leading Licensors Ranked by Licensing
Revenues (1 of 2)
Rank Firm Name Annual Licensing Typical Deals
Revenues (U.S. $
billions)
1 The Walt $45.1 Toy and apparel licensing for Disney movies
Disney such as Little Mermaid and
Company Toy Story and characters such as Winnie the
Pooh and Frozen Princess
2 PVH 18.0 Apparel licensing for such brands as Tommy
Corporation Hilfiger and Calvin Klein
3 Meredith 17.7 Bedding, furniture, and other products related
to the Better Homes and
Gardens brand
4 ICONIX 13.1 Apparel licensing for such brands as O P,
Umbro, and Danskin
5 Mattel 9.0 Toy manufacturer and licensor of iconic toy and
game brands such as
Barbie, Hot Wheels, and U NO

Sources: Based on annual reports of the individual firms; Company profiles at http://www.hoovers.com/; Avanstar,
Global License!, “The Top 150 Global Licensors,” May 1, 2015, pp. T1-T47, www.licensemag.com.

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Leading Licensors Ranked by Licensing
Revenues (2 of 2)
6 Sanrio 6.5 Toys and apparel tied to the Hello Kitty
character
7 Warner Bros. 6.0 Toy and apparel licensing from movies such as
Consumer Batman, Harry Potter, and
Products The Hobbit
8 Major League 5.5 Baseball-related video games, apparel, toys
Baseball
9 Nickelodeon 5.5 Toy and apparel licensing for TV programs such
as SpongeBob SquarePants
and Teenage Mutant Ninja Turtles
10 Hasbro 5.1 Toy and apparel licensing for TV programs and
movies such as My Little
Pony and Transformers

Sources: Based on annual reports of the individual firms; Company profiles at www.hoovers.com; Avanstar, Global
License!, “The Top 150 Global Licensors,” May 1, 2015, pp. T1–T47, www.licensemag.com.

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Main Advantages and Disadvantages of
Licensing
Advantages for licensor
• Low investment
• Low involvement
• Low effort, once established
• Low-cost initial entry strategy

Disadvantages for licensor

• Performance depends on the foreign licensee
• Licensor has limited control over its asset(s) abroad
• Runs the risk of creating a future competitor

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Disadvantages of Licensing

Source: Eddie Gerald/Alamy

Licensors run the risk of creating competitors, as Mattel discovered when it granted a license to a Brazilian
firm to market Barbie dolls. The latter firm went on to create a competitor to Barbie, the Susi doll.

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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 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.

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Franchising as an Entry Strategy

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Examples of Leading International
Franchises (1 of 2)
Franchisor Type of International Profile Example Markets
Business
Hertz Car rental and 11,555 franchises in China, Germany, Mexico, Russia
dealer agencies 150 countries
McDonald's Hamburger 36,260 restaurants Canada, France, United Kingdom, Australia,
restaurants in 120 countries China
KFC Chicken, 17,000 outlets in Brazil, China, Japan, France
sandwiches, pot 119 countries
pies restaurants
Subway Submarine 44,000 restaurants Canada, Australia, United Kingdom, New
sandwiches, in 110 countries Zealand, Germany
bagels, Salad
restaurants
Pizza Hut Pizza, pasta, 15,600 outlets in 90 China, Brazil, Canada, Japan
chicken wings countries
restaurants
Burger King Hamburger 13,000 franchises Denmark, Ecuador, South Africa,
restaurants in 87 countries Thailand

Sources: Based on Entrepreneur.com; Hoovers.com; Franchise Direct, “The Top 100 Global Franchises,” 2015,
http://www.franchisedirect.com/; company websites and reports.

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Examples of Leading International
Franchises (2 of 2)
Wyndham Hotels Hotels, 7,670 locations in Brazil, China, France, South Korea
and Resorts including Days 70 countries
Inn, Howard
Johnson,
Ramada, Super
8
Dunkin Donuts Coffee and 18,000 restaurants China, Japan, Taiwan
donut shops in 60 countries
Curves Women's 10,000 centers in Brazil, France, Mexico, Australia, Ireland,
fitness and 60 countries United Kingdom
weight-loss
centers
7-Eleven Convenience 47,700 stores in 16 Japan, Thailand, Mexico, United States
stores countries

Sources: Based on Entrepreneur.com; Hoovers.com; Franchise Direct, “The Top 100 Global Franchises,” 2015,
http://www.franchisedirect.com/; company websites and reports.

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Advantages and Disadvantages of
Franchising
Advantages for franchiser:
• Low investment;
• Can internationalize quickly to many markets;
• Low effort, once established; and
• Can leverage franchisees’ local knowledge.
Disadvantages for franchiser:
• Maintaining control over franchisees may be difficult;
• Franchiser has limited control over its assets abroad; and
• Risks creating a future competitor.

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Franchising in Emerging Markets
• China and India are home to more than 2.5 billion people
and are promising markets for fast-food franchising. E.g.,
KFC and Pizza Hut are big in China.
• Most residents of developing economies and emerging
markets lack sufficient income to patronize restaurants.
• Most do not live in the major urbanized areas where
international franchisors are concentrated.
• Laws in such countries vary and often evolve quickly.
• Food and eating habits are rooted in national culture.
• Successful franchisors carefully study economic,
demographic, legal, and cultural dimensions before
targeting foreign countries them with franchises.
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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 in the
construction and engineering services industries.
• Under a management contract, a contractor supplies
managerial know-how to operate a hotel, resort, airport,
hospital, or other facility, in exchange for compensation.
• With international leasing, the lesser rents out
machinery or equipment to clients abroad, often for
several years at a time. E.g., Airlines lease aircraft.
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Example Turnkey Projects (1 of 2)
• The most popular projects are extensions and
upgrades to metro systems, such as bridges,
roadways, and railways. Other projects include
airports, oil refineries, and hospitals.
• One of the world's largest publicly-funded turnkey
projects is in Delhi, India. The $2.3 billion project
was commissioned by Delhi Metro to build roads
and tunnels that run through the city.
• The consortium includes local firms and Skanska,
one of the largest construction firms in the world,
based in Sweden.

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Example Turnkey Projects (2 of 2)
The spectacular Petronas
Twin Towers complex in Kuala
Lumpur, Malaysia, was a
seven-year turnkey project
built by Bovis Lend Lease, one
of the world’s leading project
management and construction
companies. Among the firms
with offices in the Towers are
Accenture, Al Jazeera English,
Huawei Technologies,
Microsoft, and Reuters.
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Management of 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 whose national law
takes precedence for the contract; deciding whether to
grant an exclusive or nonexclusive arrangement; and
determining the geographic scope of territory to be
granted to the foreign partner.

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Infringement of intellectual property
The unauthorized use, publication, or reproduction of products or
services protected by a patent, copyright, trademark, or other
intellectual property right.
• Especially a problem in emerging markets and developing
economies, where people are especially vulnerable.
• Negatively affects consumer attitudes about the branding and
quality of legitimate goods.
• The quality of counterfeit goods is almost always inferior to
that of original, proprietary goods
• Hinders company inventiveness and innovation

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Counterfeiting
• Total value of counterfeit and pirated goods traded
internationally exceeds U.S. one trillion dollars, 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 Safeguarding 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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Safeguarding Intellectual Property (1 of 2)
• Research IP laws and protections in target countries.
• Register core IP in top countries for business.
• Separate value-chain activities to maintain IP secrecy.
E.g., Keep R&D and manufacturing separate so no one
can learn the entire production process.
• Emphasize leading-edge or hard-to-understand
technologies, which are usually harder to imitate.
• Hire employees who maintain high ethical standards.
• Collaborate with ethical partners. Choose reputable
suppliers with no history of IP violations.
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Safeguarding Intellectual Property (2 of 2)
• Regularly educate employees and partners about the harm of
violating IP rights.
• Include provisions in partner contracts to protect I P.
• Develop trusting relations with partners.
• Perform audits to ensure partners protect your IP.
• Pursue IP violators via prosecution, other legal means.
• Educate customers on the harm of infringing on IP.
• Cultivate contacts in local and national governments involved
in IP laws and enforcement.
• Lobby governments for stronger IP protections.

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Ethical Connections
• Counterfeiting is not confined to lower-income countries.
• Raids of retail outlets in the United States net millions of
dollars worth of counterfeit products every year.
• In 2012, for example, federal authorities in New York and
New Jersey arrested dozens of people on charges of
retailing $325 million worth of counterfeit fashions and
footwear, including Burberry scarves, Gucci handbags,
Lacoste shirts, Nike shoes, and much more.

Source: WWD: Women’s Wear Daily, “Raid by N.Y. Police and Feds Nets $2 Million in Fakes,” December 10, 2014, p.
1.

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Copyright

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