Modes of International Business

Licensing
Franchising
Management Contracts
Turnkey operations
Equity Alliances
Joint Ventures
Merger and Acquisition
Green Field Investment
 Licensing

Licensing is an agreement between two company a licenser

and licensee to grant rights of intangible property to use in
a specified geographic area for a specified period of time.
The rights may be exclusive license (the licensor can give
rights to no other company for the specified geographic area
for a specified period of time) or nonexclusive ( it can give
away rights.)
Cross-licensing: In technological world where changes
are frequent, companies in various countries often
exchange technology or intangible property rather than
competing with each other. This is known as cross licensing.
 Licensing

The amount and type of payment for licensing arrangement vary.

The value to the licensee will be greater if potential sales are high.
Potential sales depend on geographic area, the length and time the
asset will have market value, use of asset elsewhere.
Some developing countries set price controls on what licensees can
pay or insist that licensees be permitted to export license good. To
permit to export license goods, licensor ask for more money.
Many companies transfer technology at an early or even at
development stage so products hit different markets
simultaneously.
License are commonly given to companies owned in whole or part
by the licensor
 Licensing

Intangible property can be divided in to following

categories:
Patents, inventions, formulas, processes, designs,
patterns.
Copyright for literary, musical, or artistic
compositions.
Trademarks, trade names, brand names
Franchises, licenses, contracts
Methods, programs, procedures, system.
 Licensing

Motives for licensing

To establish overseas manufacturing and sales
facilities
To prevent competitors from entering in market
Reducing risk of operating facilities and holding
inventories
 Franchising

Franchising is a specialized form of licensing in

which the franchisor not only sells an independent
franchisee the use of the intangible property but also
operationally assists the business on a continuous
basis, such as through sales promotion and training.
Example: Domino’s pizza grants to franchisees the
goodwill of the domino’s name and support services
to get started, such as store and equipment layout
information and manager-training program.
 Franchising

A franchisor may penetrate a foreign market by dealing

directly with franchisees or by setting up a master
franchise and giving that organization the rights to open
outlets on its or own or develop sub fransisees in the
country or region.
Companies like Coca-Cola handles most of its bottling
franchising this way because it would be very difficult to
monitor day to day activity of each and every franchisees.
Problems in franchising are securing good locations,
finding suppliers, government rules and regulations,
difference in taste of consumer.
Comparison and differences between Franchising and
Licensing

Franchising Licensing

Governed by Securities law Contract law

Registration Required Not required

Offered to franchisee Not offered; licensee can sell similar

Territorial rights licenses and products in same area

Provided by franchiser Not provided

Support and training

Yes Yes
Royalty payments

Logo and trademark retained by Can be licensed

Use of trademark/logo franchiser and used by franchisee

McDonalds, Subway, 7-11, Dunkin Microsoft Office

Examples
Donuts

Franchiser exercise control over licensor does not have control over
control
franchisee. licensee
 Management Contracts

A management contract is an arrangement under

which operational control of an enterprise is vested by
contract in a separate enterprise which performs the
necessary managerial functions in return for a fee.
 Management contracts involve not just selling a
method of doing things (as with franchising or
licensing) but involve actually doing them.
A management contract can involve a wide range of
functions, such as technical operation of a production
facility, management of personnel, accounting,
marketing services and training
 Management Contracts

The British Airport Authority (BAA) has contracts to

manage airports in Indianapolis (U.S.), Naples
(Italy), and Melbourne (Australia) because it has
developed successful airport management skills.
Management contracts is very popular in hotel
industry because of some owners are basically
knowledgeable about real estate rather than hotel
operations.
 Turnkey operations

Turnkey operations are a type of collaborative arrangements

in which one company contracts with another to build
complete, ready-to-operate facilities
Industrial-equipment manufacturers and construction
companies are examples of turnkey operations.
If a company holds a monopoly on certain assets or resources,
other companies will find it difficult to compete to secure
turnkey contracts.
For example, the Chinese companies’ china state construction
engineering and Shanghai Construction Group have worked
on a subway system in Iran, a railway line in Nigeria, An oil
pipeline in Sudan and office buildings in United States.
 Joint Ventures

A business arrangement in which two or more parties agree to pool their

resources for the purpose of accomplishing a specific task. This task can be a
new project or any other business activity.
In a joint venture (JV), each of the participants is responsible for profits,
losses and costs associated with it. However, the venture is its own entity,
separate and apart from the participants' other business interests.
Although JVs represent a great way to pool capital and expertise and reduce
the exposure of risk to all involved, they do present some unique challenges as
well.
For instance, if party A comes up with an idea that allows the JV to flourish,
what cut of the profits does party A get? For this and other reasons, it is
estimated that nearly half of all JVs last less than four years and end in
animosity
If there are more than two parties involved in Joint ventures than it is known
as consortium.
 Equity Alliances

A strategic alliance is an organizational and legal construct wherein “partners”

are willing-in fact, motivated-to act in concert and share core competencies.
An Equity alliance is a collaborative arrangement in which one company get
ownership in another company by buying part of shares or by swapping some
shares with each other.
To a greater or lesser degree, most alliances result in the virtual integration of
the parties through partial equity ownership, through contracts that define
rights, roles and responsibilities over a span of time or through the purchase
of non-controlling equity interests.
The purpose of Equity alliance is to solidify a collaborative contract such as
buyer supplier relationships.
The fundamental purpose of an alliance is to facilitate collaboration and
varying degrees of integration between companies without necessitating a
merger or an acquisition.
 Merger and Acquisition

A general term used to refer to the consolidation of companies. A

merger is a combination of two companies to form a new company,
while an acquisition is the purchase of one company by another in
which no new company is formed
When one company takes over another and clearly established itself as
the new owner, the purchase is called an acquisition
In the pure sense of the term, a merger happens when two firms, often
of about the same size, agree to go forward as a single new company
rather than remain separately owned and operated. This kind of action
is more precisely referred to as a "merger of equals.
“Both companies' stocks are surrendered and new company stock is
issued in its place. For example, both Daimler-Benz and Chrysler ceased
to exist when the two firms merged, and a new company,
DaimlerChrysler, was created.
 Merger and Acquisition

In practice, however, actual mergers of equals don't happen

very often. Usually, one company will buy another and
proclaim that the action is a merger of equals because being
bought out often carries negative connotations.
A purchase deal will also be called a merger when both
CEOs agree that joining together is in the best interest of
both of their companies. But when the deal is unfriendly -
that is, when the target company does not want to be
purchased - it is always regarded as an acquisition.
Whether a purchase is considered a merger or an acquisition
really depends on whether the purchase is friendly or
hostile.
 Benefits of Merger and Acquisition

Staff reductions - As every employee knows, mergers

tend to mean job losses. There will be reduction of job in
similar category which helps company to save money.
 Economies of scale – with increase in size economy of
scale will also increase.
Acquiring new technology - By buying a smaller company
with unique technologies, a large company can maintain
or develop a competitive edge.
Improved market reach and industry visibility -
Companies buy companies to reach new markets and
grow revenues and earnings.
 Green Field Investment

A form of foreign direct investment where a parent company starts

a new venture in a foreign country by constructing new operational
facilities from the ground up.
 In addition to building new facilities, most parent companies also
create new long-term jobs in the foreign country by hiring new
employees.
Developing countries often offer prospective companies tax-
breaks, subsidies and other types of incentives to set up green field
investments.
After several months of negotiations with the government of the
Czech Republic, Hyundai Motor Company has started its
Greenfield investment worth CZK 28–30 billion (€0.98–€1.06
billion) Czech Republic.
 Challenges and Complexities of Collaborative
Arrangements

Although collaborative arrangements have many advantages, they

also face problems related with responsibilities, ownership, or
management structure. Major problems with collaborative
arrangements are following.
Relative importance:
When one partner gives more attention to management to a
collaborative arrangement than the other does. If things go wrong,
partners will start blaming each other for their role in failure of a
company.
Divergent Objectives:
Objective of companies in collaborative arrangements may change
with time. Example; reinvest earnings for growth or divide
dividends, expanding product line and sales territory.
 Challenges and Complexities of Collaborative
Arrangements

Control problem:
In collaborative arrangements, even though control is given to one
of the partners but both may be held responsible for problems.
Dispute over ingredients of product, reputation of trademark,
quality of product and its effect on partners rise questions of
control between companies.
Comparative contributions and appropriations
Capability of partners in terms of contributing technology, capital
or some other asset may diminish compared to its partner’s
capability over time.
Cultural clashes
Differences in country cultures and corporate cultures.