Licensing, Franchising and

Other Contractual Entry

Strategies
Chapter 15
Contractual Entry Strategies
◦ There are two common types of contractual entry strategies;
1. Licensing
2. Franchising

Unique aspects of contractual relationships

◦ They are governed by a contract that provides the focal firm with moderate level of control
over the foreign partner
◦ They typically include the exchange of intangibles and services
◦ Firms can pursue them independently or in conjunction with other entry strategies
◦ They provide dynamic, flexible choice
◦ They often reduce local perceptions of the focal firms as a foreign enterprise
◦ They generate a consistent level of earnings from foreign operations
Contractual Entry Strategies
Contractual relationships emphasize the exchange of intellectual property, which includes
various types;
•A patent gives an inventor the right to prevent others from using or selling an invention for a
fixed period, typically up to 20 years
•A trademark is a distinctive design, symbol, logo, word or serious of words placed on product
label
•A copyright protects original works of authorships
•An industrial design describes the appearance or features of a product
•A trade secret is confidential expertise or information that has commercial value
•A collective mark is a logo belonging to an organization
 The nature of Licensing
Licensing as
an Entry
Strategy

There are two types of

licensing agreements ;
oTrademark and copyright
licensing
oKnow-how licensing
Trademark and Copyright Licensing
& Know-how Licensing
Trademark and copyright licensing
•Provides a firm permission to use another firm’s proprietary names, characters or logos
•Trademark licensing examples; Disney, FIFA, Harley-Davidson, LeBron James etc

Know-how licensing
•A know-how agreement is a contract in which the focal firm provides technological or
management knowledge about how to design, manufacture or deliver a product
•Common practicing in pharmaceutical industry in order to reduce R&D expences
The World’s
Top
Licensing
Firms
Advantages & Disadvantages of
Licensing
Franchising as an Entry Strategy
•Franchising is an advanced form of licensing in which the focal firm, the franchisor, allows an
entrepreneur, the franchisee, the right to use an entire business system in exchange for
compensation
•International franchisors McDonald’s, Subway, Hertz, FedEx etc.
•Franchises generate the biggest volume of sales in advanced economies such as the United
States, Europe, and Japan
•A large proportion of franchises in Africa and less developed Asia are international
 The nature of Franchising

Franchising as
an Entry
Strategy
Top Global
Franchisors
Advantages & Disadvantages of
Franchising
Advantages and Disadvantages of Franchising to the Franchisor
Advantages & Disadvantages of
Franchising
Advantages and Disadvantages of Franchising to the Franchisee
Managerial Guidelines for Licensing
& Franchising
•Requiring skillful research, planning, and execution
•The key to success is often finding the right partner abroad
•For franchisors, developing capable partners in local supply chains is also a prerequisite
•In Turkey, Little Caesars pizza franchisees found it difficult to locate dairy companies that could
produce the cheese varieties they required
•When McDonald’s first entered India, it faced resistance from the government
Other Contractual Entry Strategies
•Turnkey contracting: is an arrangement in which the focal firm or a consortium of firms plans,
finances, organizes, manages, and implements all phases of a project abroad and then hands it over
to a foreign customer after training local workers
•Build-operate-transfer (BOT): a firm or consortium of firm’s contracts to build a major facility
abroad, such as a dam or water treatment plant; operates it for a specified period; and then
transfers ownership to the project sponsor
•Management contract: a contractor supplies managerial know-how to operate a hotel, hospital,
airport, or other facility in exchange for compensation
•Leasing: a focal firm (the lessor) rents out machinery or equipment to corporate or government
clients abroad (lessees), often for several years at a time
•Professional service firms: firms in the industries of accounting, advertising, market research,
consulting, engineering and IT services have internationalized rapidly during the past three decades
Infringement of Intellectual Property:
A Global Problem
•Safeguarding intellectual property and foreign operations under contractual arrangements is
usually challenging
•Counterfeiting and piracy can be particularly troublesome in emerging markets and developing
economies, where intellectual property laws are often weak or poorly enforced
•The total value of counterfeit and pirated products is expected to reach approximately $2 trillion
annually by 2022
•Annual piracy losses in CDs and music exceed $100 million in Brazil, and losses in business
software exceed $1 billion in Russia
•Apple sued Samsung for alleged infringement of smartphone patents. Apple won $120 million in
the case, which had been litigated over several years
•Samsung sued China’s Huawei Technologies for alleged pirating of various smartphone patents
Protecting Intellectual Property
•Management needs to understand local intellectual property laws and enforcement procedures
•The firm should register patents, trademarks, trade secrets, and copyrights with local
governments, especially in countries with weak antipiracy laws
•Licensing contracts should include provisions that require the licensee to share improvements or
technological developments on the licensed asset with the licensor
•The firm should monitor the activities of local business partners for potential leaks of vital
information and assets
•The firm should monitor the activities of local business partners for potential leaks of vital
information and assets