Chapter 10 cont’d

Licensing and Franchising

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License
• contract whereby licensor allows temporary use of technology, patents, trademarks, or other proprietary advantages to a licensee for a fee

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Why use Licensing?
- less expensive market entry - less time and risk if firm doesn’t have financial, managerial resources or international knowledge to export or invest - useful way to test market - market too small to justify direct effort - host country restrictions on imports or FDI - technology feedback from licensee possible - lower manufacturing costs in foreign country
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Risks associated with Licensing
- may lose technology and create a competitor - host country may have poor intellectual property protection - damage to reputation by poor quality/ethics of licensee - less profits than exporting or FDI - difficult to enforce agreement
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Costs of Licensing
- protection of intellectual property - establishing and maintaining the agreement - opportunity costs

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Negotiating the Agreement
ensure licensing is your best option - understand your capability and needs - carefully choose the best potential licensee - consult lawyers in your country and host country before starting - if exchanging confidential info during negotiations, protect yourself by having parties sign confidentiality agreement” - draft “memorandum of understanding” (MOU) which: - clarifies negotiations - bars either party from entering into negotiations with other firms, - sets timetable for completing negotiations

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The Agreement
- description of parties - purpose of agreement - roles of parties - defined terms - technology, patents, etc. - set of schedules - technical specs etc. - nature of rights being granted: - territory - any exclusive rights - rights to sub-license - duration of agreement - rights to technology improvements - rights to technology flowback - royalties, payments, timing, currencies - protection of technology - minimum performance requirements - settlement of disputes
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Franchising
a form of licensing in which franchisor grants to franchisee rights to a complete business concept, including a trademark. Franchisee provides own capital and owns their own business.

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Reasons for Franchising
- franchisors - rapid market penetration at low cost, increased cash flow from franchising fees, economies of scale - franchisees - proven products or concepts, recognizable brands, established business procedures, assistance from franchisor

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The Agreement
- most terms similar to license agreement - more emphasis on strict compliance by licensee to requirements of licensor - retention of franchise tied to performance standards

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Legal Issues With Licensing, Franchising
- territory restrictions often illegal - EU - max territory restriction - 5 years ( parallel imports allowed through “passive sales) - customer limitations often illegal - minimum or maximum terms ( e.g. 3 - 30 years) - licensor’s product liability - mandatory - confidentiality agreements may be illegal - compulsory grant backs of licensee improvements may be illegal - “tied” purchasing - may be illegal - price fixing ( licensor sets sales price) - illegal - royalty payments may be restricted i.e. - % of sales, annual fee, ceiling - royalty payments by subs to HQ often restricted (illegal under NAFTA)

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• But somehow – Franchising is enormously popular around the world

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