Chapter 16

Licensing, Franchising and

Other Contractual Strategies

International Business Strategy,

Management
& the New Realities by
Cavusgil, Knight & Riesenberger

International Business: Strategy, Management, and the New 1

Realities
 Learning Objectives

1. The nature of contractual entry strategies in

international business
2. Licensing
3. Advantages and disadvantages of licensing
4. Franchising
5. Advantages and disadvantages of
franchising
6. Other contractual entry strategies
7. Management of licensing and franchising
International Business: Strategy, Management, and the New 2
Realities
 Foundation Concepts

Cross-border contractual relationships:

Granting permission to use intellectual property
to a foreign partner in exchange for a continuous
stream of payments.
Intellectual property: Ideas or works created by
firms or individuals, such as patents,
trademarks, and copyrights. It incorporates 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’.

International Business: Strategy, Management, and the New 3

Realities
 Two Types of Contractual
Relationships
• Licensing is an arrangement in which the
owner of intellectual property (IP) grants
another firm the right to use that property
for a specified period of time in exchange
for royalties or other compensation.
• Franchising is an arrangement in which
the firm allows another the right to use an
entire business system in exchange for
fees, royalties or other forms of
compensation.
International Business: Strategy, Management, and the New 4
Realities
 Contractual Relationships are Fairly Common

• Pharmaceutical firms engage in cross-licensing practices

where they exchange scientific knowledge about producing
specific products, as well as the rights to distribute these in
certain geographic regions.
• Professional service firms -- e.g., architecture, engineering,
advertising, and consulting-- extend their international
reach through contracts with foreign partners.
• Service firms in retailing, fast food, car rentals, television
programming, and animation rely on licensing and
franchising agreements.
• 7-Eleven runs the world's largest chain of convenience
stores, with about 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. are
operated through licensing or franchising arrangements.

International Business: Strategy, Management, and the New 5

Realities
 Unique Aspects of Contractual Relationships

• Governed by a contract that provides the focal firm moderate

level of control over the foreign partner. A formal agreement
specifies the rights and obligations for both partners. Control
refers to the ability of the focal firm to influence the decisions,
operations, and strategic resources of a foreign venture. The
focal firm maintains ownership and jurisdiction over its IP.
• Typically involve exchange of intangibles (intellectual
property) and services. Examples of intangibles that
firms exchange include technical assistance and know-how.
Along with intangibles, however, firms may also exchange
products or equipment.
• Can be pursued independently or in conjunction with other
foreign market entry strategies. Contractual relationships may
accompany and support FDI and exporting. A focal firm may
pursue a contractual relationship with certain customers,
countries, or products, but not others.

International Business: Strategy, Management, and the New 6

Realities
Unique Aspects of Contractual Relationships (cont.)

• Provide for a dynamic, flexible choice. Over time, the

focal firm may switch to another way of servicing foreign
markets. For example, franchisors such as
McDonald's or Coca-Cola often find it desirable to
acquire some of their franchisees and bottlers,
respectively. In doing so, they would be switching from a
contractual to an ownership-based entry strategy.
• Often mitigate liability of foreignness for the focal firm.
Since the focal firm partners with a local firm, it may be
able to shield some of the criticism directed towards
MNEs.
• Generate a predictable level of earnings from foreign
operations. In comparison to FDI, contractual
relationships imply reduced volatility and risk.

International Business: Strategy, Management, and the New 7

Realities
 Types of Intellectual Property

• A patent provides an inventor with the right to prevent others

from using, selling or importing an invention for a fixed period
– typically, up to 20 years. It is granted to any firm or individual
that invents or discovers any new and useful process,
machine, manufactured product, or any new and useful
improvement.
• A trademark is a distinctive design, symbol, logo, word, or
series of words placed on a product label. It identifies a
product or service as coming from a common source.
E.g., British Petroleum’s ‘BP’ acronym, McDonald's golden
arches, and Nike’s swoosh symbol.
• A copyright protects original works of authorship, giving the
creator the exclusive right to reproduce the work, display and
perform it publicly, and to authorize others to do these
activities. Copyrights cover works from music, art,
literature, films, and computer software.

International Business: Strategy, Management, and the New 8

Realities
 Types of Intellectual Property (cont.)

• An industrial design refers to the appearance or features

of a product. The design is intended to improve the
aesthetics and usability of a product in order to increase its
production efficiency, performance, or marketability.
The thin Apple iPod with the company logo is a well-known
industrial design.
• A trade secret is confidential know-how or information that
has commercial value. Trade secrets include information
such as production methods, business plans, and customer
lists. For example, the formula to produce Coca-
Cola is a trade secret.
• A collective mark is a logo belonging to an association or
group whose members have given firms the right to use the
mark to identify the origin of a product or service. E.g.,
ILGWU is a collective mark for the members of
International Ladies Garment Workers Union.

International Business: Strategy, Management, and the New 9

Realities
 Intellectual Property Rights (IPRs)

• IPRs refer to the legal claim through which the

proprietary assets of firms and individuals are protected
from unauthorized use by other parties.
• The fundamental rationale for IPRs is to provide
inventors with a monopoly advantage, for a specified
period of time, so that they can exploit their inventions
and create commercial advantage.
• Such legal rights enable inventors not only to recoup
investment costs, but also to acquire power and
dominance in markets by granting a period of years in
which the inventor need not face direct competition from
competitors producing the same product.
• Without legal protection and the assurance of
commercial rewards, most firms and individuals would
have little incentive to invent.

International Business: Strategy, Management, and the New 10

Realities
 Licensing

• A licensing agreement specifies the nature of the

relationship between the licensor (owner of IP) and the
licensee (the user).
• High technology firms routinely license their patents
and know-how to foreign companies. Intel has licensed
the right to a new process for manufacturing computer
chips to a chip manufacturer 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 the production
of shirts and hats to clothing manufacturers in Hong
Kong. Disney also licenses its trademark names and
logos to manufacturers of apparel, toys, and watches
for sale worldwide.

International Business: Strategy, Management, and the New 1

Realities 1
 The Nature of Licensing Agreement

• Upon signing a licensing contract, the licensee

pays the licensor a fixed amount upfront and an
ongoing royalty (typically 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 consultation, training in how
to deploy the asset, engineering, or adaptation.
However, certain types of licensable assets,
such as copyrights and trademarks, have much
lower transfer costs.

International Business: Strategy, Management, and the New 13

Realities
 Licensing Contract

• The licensing contract typically runs from 5-7 years,

and is renewable at the option of the parties.
• While the licensor usually must provide technical
information and assistance to the licensee, once the
relationship is established, it has no direct involvement
in the market and provides no ongoing managerial
guidance.
• Most firms enter into exclusive agreements, implying
that the licensee is not permitted to share the licensed
asset with any other company within a prescribed
territory.
• In addition to operating in its domestic market, the
licensee may also be permitted to export to third
countries.

International Business: Strategy, Management, and the New 14

Realities
 Cross-Border Licensing is Fairly Common

• In the food industry, Peter Paul Mounds and Almond

Joy are owned by the British food firm Cadbury
Schweppes and produced in the United States through
a licensing agreement with Hershey Foods.
• Planters, Sunkist, and Budweiser are owned by U.S.
companies and sold in Britain, Japan, and Singapore
through licensing agreements with local companies.
• Coca-Cola has a licensing agreement to distribute
Evian bottled water in the United States 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.
International Business: Strategy, Management, and the New 15
Realities
 Trademark Licensing

• Trademark licensing 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 such merchandise as clothing,
games, food, beverages, gifts, novelties, toys, and home
furnishings. E.g., Coca Cola, Harley-Davidson, Laura
Ashley, Disney, Michael Jordan, and your favorite
university!
• Playboy Enterprises successfully licensed its logo and
other marketing assets to clothing manufacturers abroad.
• A trademark like Harry Potter generates millions of dollars
to the owner, with little effort. U.S. companies derive
trademark-licensing revenues excess of $100 billion
annually.

International Business: Strategy, Management, and the New 16

Realities
 Copyright Licensing

• In many countries, a copyright gives the owner

the exclusive right to reproduce the work,
prepare derivative works, distribute copies, or
perform or display the work publicly.
• Original works include art, music, and literature,
as well as computer software.
• The term of protection varies by country, but the
creator’s life plus 50 years is typical.
However, because many countries offer little or
no copyright protection, it is wise to investigate
local copyright laws before publishing a work
abroad.
International Business: Strategy, Management, and the New 17
Realities
 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 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.

International Business: Strategy, Management, and the New 18

Realities
 Cross-Licensing

• Cross-licensing: In pharmaceuticals,
chemicals, and semiconductors industries,
technology is acquired in reciprocal licensing
arrangements among firms from the same or
similar industries.
• In industries where the rate of technological
advances is rapid and where innovations often
build on each other, technology licensing from
competitors provides key advantages. It
reduces the costs of innovation by avoiding
duplication of research, while reducing the risk
of excluding any one firm from access to new
developments.

International Business: Strategy, Management, and the New 19

Realities
 Top Licensing Firms

• Exhibit 15.2 lists the world’s top licensing

firms by annual revenues.
• All but one (Sanrio) are based in the U.S.
• The greatest amount of licensing occurs
in the apparel, games, and toy industries.
• Licensing sales have benefited
immensely from the emergence of large-
scale retailers, such as Wal-Mart and
Carrefour, and Internet-based selling.

International Business: Strategy, Management, and the New 20

Realities
 Advantages of Licensing

• Licensing requires neither substantial capital investment

nor involvement of the licensor in the foreign market.
Licensing allows the firm to gain market presence
without FDI. For this reason, it is a preferred strategy
of SMEs.
• Licensing allows the firm to exploit the results of R&D.
Once the licensing relationship is established, the
licensor need invest little additional effort while it
receives a stream of royalty income until the end of the
contract period.
• Unlike other foreign entry strategies, the licensor bears
no costs of establishing a physical presence in the
market or maintaining inventory there.

International Business: Strategy, Management, and the New 22

Realities
 Advantages of Licensing (cont.)

• Licensing makes entry possible in countries that restrict

foreign ownership in specific industries, such as defence and
energy, that may be considered critical for national security.
• Licensing enables firms to enter smaller markets or those that
are difficult to enter because of trade barriers, such as tariffs
and bureaucratic requirements. Drug manufacturer Roche
entered a licensing agreement with Chugai Pharmaceuticals in
Japan in order to expand its presence in the Japanese
patented medication market.
• Licensing can also be used as a low-cost strategy to test the
viability of foreign markets. By establishing a relationship
with a local licensee, the foreign firm can learn about the target
market and devise the best future strategy for establishing a
more substantive presence there.
• A firm may use licensing as a strategy to pre-empt the entry of
competitors in a target market.

International Business: Strategy, Management, and the New 23

Realities
 Disadvantages of Licensing

• Because royalties are based on the licensee’s sales volume,

the licensor depends for its performance on the licensee’s
sales and marketing prowess. A poor partner may be
unable to generate substantial sales.
• As a moderate-control entry strategy, the licensor is limited in
its ability to control the manner in which its asset is used.
The licensor's reputation can be harmed.
• If the licensee is very successful, the licensor may wish it had
entered the market through a more lucrative entry strategy.
• Focal firm should ensure that its value intellectual assets do
not fall into the hands of individuals or firms likely to become
competitors.
• The risk of creating a future competitor is substantial.
The rival may go on to exploit the licensor’s IP for entering
third countries or creating products that differ somewhat from
those prescribed in the licensing contract.

International Business: Strategy, Management, and the New 25

Realities
 Franchising

• 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.
• As with licensing, an explicit contract defines
the terms of the relationship.
• McDonald’s, Subway, Hertz, and FedEx are
well-established international franchisors.
• Franchising is very common in international
retailing: Benetton, Body Shop, Yves Rocher,
Marks & Spencer, etc.

International Business: Strategy, Management, and the New 26

Realities
 Business Format Franchising

• Although there are various types of franchising, the most

typical arrangement is business format franchising (system
franchising).
• The franchisor transfers to the franchisee a total business
method -- including production and marketing methods, sales
systems, procedures, and management know-how, and the
use of its name.
• The franchisor also provides the franchisee with training,
ongoing support, incentive programs, and the right to
participate in cooperative marketing programs.
• In return, the franchisee compensates the franchisor, usually
via a royalty representing a percentage of the franchisee's
revenues.
• The franchisee may be required to purchase certain
equipment and supplies from the franchisor to ensure
standardized products and consistent quality.

International Business: Strategy, Management, and the New 27

Realities
 Franchising: A Complementary Strategy

• While licensing relationships are often short-lived,

the parties to franchising normally establish an
ongoing relationship that may last many years.
• Compared to licensing, franchising is usually a much
more stable, long-term entry strategy.Firms often
combine franchising with other entry strategies.
• About 70 percent of the more than 2,000 Body Shop
stores worldwide are operated by franchisees, while
the rest are owned by Body Shop headquarters.
• Large retailers such as IKEA and Carrefour often
employ both franchising and FDI when expanding
abroad.

International Business: Strategy, Management, and the New 29

Realities
 Franchising: More Comprehensive than Licensing

• Franchising is more comprehensive than licensing because

the franchisor prescribes virtually all business activities of
the franchisee.
• The franchisor tightly controls the business system to
ensure consistent standards. Franchisors employ
globally recognized trademarks and attempt to guarantee
the customer a uniform and consistent retail experience
and product quality.
• Completely standardized business activities are difficult to
replicate across diverse markets. Differences in areas
such as key ingredients, worker qualifications, and physical
space may necessitate changes to the franchise formula.
• Space restrictions in Japan forced KFC to reconfigure its
cooking equipment from a wide horizontal design to a
narrower, more vertical design. Japanese KFC’s tend to be
multi-storied, to save on the high cost of land.
International Business: Strategy, Management, and the New 30
Realities
 Master Franchisee

• Some firms may choose to work with a single,

coordinating franchisee in a particular country/region.
In this master franchise arrangement, an independent
company is licensed to establish, develop, and
manage the entire franchising network in its market.
• The master franchisee has the right to sub-franchise to
other independent businesses and thus assume the
role of the local franchisor. E.g., McDonald's in Japan.
• From the focal firm’s perspective, the arrangement is
the least capital- and time-intensive. The trade-off is
that, by delegating the responsibilities of identifying
and working with its franchisees directly, it gives up
considerable control over its foreign operations.

International Business: Strategy, Management, and the New 31

Realities
 Attractions of Master Franchising

• Franchisees prefer the arrangement because it

provides an exclusive, large, predefined territory (often
an entire country) and substantial economies of scale
from operating numerous sales outlets simultaneously.
• The franchisee gains access to a proven retailing and
marketing concept, and partnership with a corporate
headquarters and master franchisees in other
territories, which typically provide support, know-how
and the latest innovations in the field.
• Master franchising accounts for as much as 80% of
international franchising deals. Sbarro, Inc., the
Italian pizza chain, operates via master franchises in
Belgium, Britain, Canada, Guatemala, Kuwait and the
Philippines.

International Business: Strategy, Management, and the New 32

Realities
 Who Are the Top Franchisors?

• Franchising is a global phenomenon and

accounts for a large proportion of international
trade in services.
• Many product and service categories lend
themselves to international franchising: fast-
food outlets, health and fitness, professional
business services, and home-improvement
products and services, and various types of
retailers.
• The U.S. is home to the largest number of
33franchisors and dominates international
franchising. They account for roughly $1
trillion in annual U.S. retail sales.
International Business: Strategy, Management, and the New Realities 33
 Advantages and Disadvantages of Franchising

• While franchisors provide vital assets, franchisees

perform local functions in foreign markets, such as
marketing and distribution, that the franchisor usually
cannot perform.
• The franchisor possesses economies of scale, a wealth
of intellectual property, and know-how about its own
industry, while the franchisee has entrepreneurial drive,
substantial knowledge about the local market and how to
run a business there.
• Franchising combines centralized control over foreign
operations and a standardized business approach with
the skills of local entrepreneurs who have enough
flexibility to deal with local market conditions.

International Business: Strategy, Management, and the New 35

Realities
 The Franchisor Perspective

• For the franchisor, franchising is a low-risk, low-cost entry

strategy. It offers the ability to develop new and distant
international markets relatively quickly and on a larger scale
than possible for most non-franchise firms.
• The franchisor can generate additional profit with only small,
incremental investments in capital, personnel, and distribution.
• A major disadvantage to the franchisor is the need to maintain
control over potentially thousands of outlets worldwide.
• When dealing in numerous, complex international markets,
the risk of creating competitors is substantial. The
franchisor must disclose business secrets and detailed
knowledge.
• When the agreement is terminated, some franchisees
leverage their newly acquired knowledge to remain in
business, often by slightly altering the franchisor’s brand name
or trademark.
International Business: Strategy, Management, and the New 36
Realities
 The Franchisee Perspective

• From the perspective of the franchisee,

franchising is especially beneficial to the SME.
Most small firms lack substantial resources or
strong managerial skills.
• The big advantage of franchising to the
franchisee is the ability to launch a business
using a tested business model.
• In essence, franchising amounts to cloning
best practices. It greatly increases the small
firm’s chances for success by duplicating a
tried-and-true business format.
International Business: Strategy, Management, and the New 38
Realities
 Turnkey Contracting

• Turnkey contracting refers to an arrangement

where the focal firm or a consortium of firms plan,
finance, organize, manage, and implement all
phases of a project abroad and then hand it over to
a foreign country after training local personnel.
• Contractors are firms in construction, engineering,
design, and architectural services. Typically, a
major facility (e.g., a nuclear power plant or a
subway system) is built, put into operation, and then
handed over to the project sponsor, often a national
government.
• Involves construction, installation, and training, and
may include follow-up contractual services, such as
testing and operational support.

International Business: Strategy, Management, and the New 40

Realities
 Examples of Turnkey Projects

•Among the most popular

turnkey projects are extensions
and upgrades to metro systems,
such as bridges, roadways, and
railways.
•Turnkey projects are also used
to construct airports, harbors,
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
Realities
through the city’s central
International Business: Strategy, Management, and the New 41
 Top International Construction Contractors Based on Contract and
Revenue from Projects Outside Home Country (cont)

Rank Contractor 2006 Revenue (U.S.$ millions)

Based on
International Total
2007
Revenues

11. Royal Bam Group NV, The Netherlands 5,892 10,844

12. Bovis Lend Lease, U.K. 5,680 8,353
13. Consolidated Contractors Int’l Co., Greece 3,941 3,941
14. China Communications Construction Group, 3,380 14,734
China
15. JGC Corp., Japan 3,159 3,804
16. Chiyoda Corp., Japan 3,053 3,517
17. Grupo ACS, Spain 3,004 18,526
18. China State Construction Eng’g Corp., China 2,956 16,146

19. PCL Construction Enterprises, U.S.A. 2,527 4,110

20. Baldour Beatty PLC, U.K. 2,380 9,073
Top International Construction Contractors Based on Contract and
Revenue from Projects Outside Home Country (cont.)
Rank Contractor 2006 Revenue (U.S.$ millions)
2007 International Total
Revenue
s

21. Construtora Norberto Odebrecht, Brazil 2,267 3,493

22. FCC, Fomento de Construc. Y Contratas, 2,155 11,894
Spain
23. Kajima Corp., Japan 2,150 13,981
24. Taisei Corp., Japan 2,069 14,176
25. Ferrovial Agroman SA, Spain 2,027 6,523
26. Eiffage, France 2,010 13,970
27. Foster Wheeler Ltd., Clinton, N.J., USA 1,920 2,022
28. Jacobs, Pasadena, Calif., U.S.A. 1,886 3,987
29. Petrofac Ltd., Channel Islands, U.K. 1,863 1,863
30. Ohl Sa (Obrascon Huarte Lain Sa), Spain 1,801 4,325
 Build-Operate-Transfer (BOT)

• Under a build-operate-transfer arrangement,

the firm contracts to build a major facility
abroad, such as a dam or water treatment
plant, operates the facility for a specified
period, and then transfers its ownership to the
project sponsor, typically the host-country
government or public utility.
• BOT is a variation of turnkey contracting.
Instead of turning the completed facility to the
project sponsor, in a BOT deal, the builder
operates it for a number of years before
transferring ownership to the sponsor.

International Business: Strategy, Management, and the New 45

Realities
 BOT Projects

•In a typical deal, a consortium of private

multinational financiers, contractors, and advisors
joins together to finance, design, construct, and
operate the facility.
•During the time that the consortium operates the
facility, it can charge user fees, tolls, and rentals to
recover its investment and generate profits.
•Alternatively, the host-country government may
pay the BOT partner for services provided by the
facility, such as water from a treatment plant, at a
price calculated over the life of the contract, to
cover its construction and operating costs and
provide a reasonable return.
International Business: Strategy, Management, and the New 46
Realities
 Management Contract

• Under a management contract, a contractor supplies

managerial know-how to operate a hotel, resort,
hospital, airport, or other facility, in exchange for
compensation.
• In contrast to licensing or franchising, management
contracts involve specialized know-how as well as
actual operation of a facility. The contractor
provides its unique expertise in running a facility
without actually owning it.
• The client receives assistance in managing local
operations, while the management company
generates revenues without having to make a capital
outlay. Much of Disney’s income from its theme parks
in France and Japan comes from providing such
services for the parks (largely owned by others).
International Business: Strategy, Management, and the New 47
Realities
 International Leasing

• International leasing is another contractual strategy

in which focal firm (the lessor) rents out machinery
or equipment to corporate or government clients
abroad (lessees), often for several years at a time.
• The lessor retains ownership of the property
throughout the lease period and receives regular
lease payments from the lessee.
• From the perspective of the lessee, leasing helps
reduce its costs of using needed machinery and
equipment. A major advantage for the lessor is the
ability to gain quick access to target markets, while
putting assets to use earning profits.

International Business: Strategy, Management, and the New 48

Realities
 An Example of Leasing

• Amsterdam-based ING Lease International

Equipment Management owns and leases
Boeing commercial aircraft to clients such as
Brazil's Varig airlines.
• Dubai-based Oasis Leasing leases aircraft to
Air New Zealand, Airtours, Gulf Air, Go, Virgin
Express, and Macedonian Airlines.
• A Japanese-based leasing firms ORIX leases
everything from computers and measuring
equipment to aircraft and ships. The firm
operates over 1,300 offices worldwide and
generated sales of nearly $7 billion in 2006.

International Business: Strategy, Management, and the New 49

Realities
 Internationalization of Professional Service Firms

• Professional services include accounting, advertising,

market research, consulting, engineering, legal
counsel, and IT services.
• These firms use both FDI (company-owned foreign
branches) as well as independent contractors/agents
to gain a foothold in the foreign market.
• Some professional service firms internationalize by
simply following their key clients abroad.
• The Internet has greatly aided the international spread
of some business process services such as software
engineering. As a result, their production is
increasingly centralized in cost-effective locations such
as India and Eastern Europe.
International Business: Strategy, Management, and the New 50
Realities
Challenges of Professional Service Firms
with Internationalization

•Professional qualifications that allow firms

to practice law, dentistry, medicine, or
accounting in the home country are rarely
recognized by other countries. E.g., if you
are certified a CPA in the U.S. and would like
to practice accounting in Argentina, you
must earn local certification in that country.
1.Professionals who work abroad for long
periods generally must obtain work visas in
the countries where they are employed.
2.Professional services often require
intensive interaction with the local public,
which necessitates language and cultural
skills.
International Business: Strategy, Management, and the New 51
Realities
 Entry Strategies of Professional Service Firms

• A mix of direct investment and contractual strategies

are used concurrently.
• Explicit contracts can coexist with other entry
modes. E.g., an ad agency such as Publicis Groupe
(France) will maintain a network of company-owned
branches in some countries while simultaneously
entering into contractual relationships in others.
• Professional service firms are likely to serve their
major markets with direct investment. In numerous
small markets, however, they will enter into
contractual relationships with independent partner
firms in the same line of business. These
independent contractors are sometimes known as
agents, affiliates, or representatives.

International Business: Strategy, Management, and the New 52

Realities
Management of Licensing and Franchising

•Licensing and franchising are complex

undertakings, and they require skilful
research, planning, and execution.
•The firm must conduct advance research on
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 interpreting
and enforcing 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.
International Business: Strategy, Management, and the New 53
Realities
 Careful Selection of Qualified Partners

The most qualified franchisees tend to have:

•Entrepreneurial drive
•Access to capital and prime real estate
•A successful business track record
•Good relationships with local and national government
•Strong links to other firms including facilitators
•A pool of motivated employees, and
•Willingness to accept oversight and to follow company
procedures.
•In emerging markets, a knowledgeable, locally connected
partner can help sort through various operational problems.
•In China and Russia, partnering with a state-owned
enterprise may be necessary to navigate complex legal and
political environments.

International Business: Strategy, Management, and the New 54

Realities
 Safeguarding Intellectual Property

• Working with independent partners through contractual

arrangements provides the focal firm with only moderate
control over foreign partners.
• Laws that govern contractual relations are not always
clear, conflicts arise due to cultural and language
differences, and contract enforcement abroad is often
costly or unattainable.
• In addition to devising a strong contract, the focal firm
should emphasize developing a close, trusting
relationship with foreign partners.
• The focal firm can enhance the relationship by providing
the foreign partner with superior resources and strong
support.

International Business: Strategy, Management, and the New 55

Realities
 Infringement of IP Rights (IPR)

• Infringement of intellectual property rights (IPR)

is the unauthorized use, publication, or reproduction
of products and services that are supported by a
patent, copyright, trademark, or other intellectual
property rights.
• Violation of IPR is known as piracy. Infringement of
intellectual assets often results in the production and
distribution of counterfeit or fake products or services
that imitate the original produced by the asset’s owner.
• Estimated losses from piracy are estimated to be:
$120 m. in Brazil (movies); $510 m. in China
(entertainment software); and $800 m. in Russia
(business software).
International Business: Strategy, Management, and the New 56
Realities
 Dimensions of Counterfeiting

• The total value of counterfeit and pirated goods crossing

borders and traded over the Internet worldwide is
approximately U.S. $600 billion. To put this in perspective,
this figure is roughly 5% of U.S. GDP.
• Counterfeiters create knockoffs of products that include
clothing, fashion accessories, watches, medicines, and
appliances. Some use a product name that differs only
slightly from a well-known brand, but is close enough that
buyers associate it with the genuine product. They alter the
name or design of a product just enough so that prosecution
is hampered.
• While companies such as Rolex, Louis Vuitton and Tommy
Hilfiger are well-known victims, counterfeiting is widespread
even in industrial products.
• Counterfeit pharmaceutical products, medical devices and
even fake car parts (such as brake pads, fan belts, and
batteries) find their very into international markets.
International Business: Strategy, Management, and the New 58
Realities
 Managerial Guidelines for Protecting IP

• In advanced economies, intellectual property is usually

protected within established legal systems and methods of
recourse. A firm can initiate legal action against someone
who steals its intellectual assets and will usually achieve a
satisfactory remedy.
• Advanced economies have signed treaties that support the
international protection of IPRs. These include: The Paris
Convention for the Protection of IP, The Berne Convention for
the Protection of Literary and Artistic Works, and The Rome
Convention for the Protection of Performers and Broadcasting
Organizations, all administered by WIPO.
• Recently, the WTO created the Agreement on Trade Related
Aspects of Intellectual Property Rights (TRIPS) to cover
various intellectual property, including patents, copyrights,
trademarks, industrial designs, and trade secrets. TRIPS lays
out enforcement and dispute-resolution procedures.

International Business: Strategy, Management, and the New 59

Realities
 IPR Protection Outside of WIPO and TRIPS

• Rights granted by a patent, trademark registration or

copyright apply only in the country where they are
obtained; they confer no protection abroad.
• Some governments may pursue priorities other than
rewarding and promoting innovation, such as gaining
access to, and affordability of, new technologies.
• In each country, IP protection varies as a function of
local laws, administrative practices, and treaty
obligations. IPR enforcement depends on the
attitudes of local officials, substantive requirements of
the law, and court procedures.
• As a result, former licensees and franchisees can
launch businesses with proprietary knowledge.
International Business: Strategy, Management, and the New 60
Realities
Managerial Guidelines for Protecting IPR

•Understand local IP laws and enforcement

procedures, especially when exposed
assets are very valuable. For each
target country, determine how easily
licensed assets can be replicated. Avoid
countries with weak IP laws.
•Register patents, trademarks, trade
secrets, and copyrights with the
government in each country where the firm
does, or intends to do, business. Also
register in countries known to be sources of
counterfeit products.
•Ensure that licensing and franchising
agreements provide for oversight to ensure
IP is
Realities
used as intended.
International Business: Strategy, Management, and the New 62
 Managerial Guidelines for Protecting IPR (cont.)

• Include a provision in licensing contracts that requires the

licensee to share any improvements or technological
developments on the licensed asset with the licensor.
• Pursue criminal prosecution or litigation against those
who infringe on protected assets, such as logos and
proprietary processes. E.g., Mead Data Central, Inc.,
owner of the Lexis-Nexis brand of computerized legal
research services, sued Toyota when the Japanese firm
began selling its new luxury automobiles under the name
‘Lexus’. The suit failed, but shows how Mead is
resolute in protecting its assets.
• Monitor franchisee, distribution, and marketing channels
for any asset infringements. Monitor the activities of
local business partners for leaks of vital information and
assets.

International Business: Strategy, Management, and the New 63

Realities
 Managerial Guidelines for Protecting IPR (cont.)

• Include in franchise contracts a requirement that the

franchisee, suppliers, and distributors report
infringements of products or processes.
• Guard trade secrets closely. Use password-based
security systems to limit access to computers and
other equipment that contain intellectual property.
Use surveillance equipment and firewalls to prevent
large file transfers.
• Train employees to use registered assets correctly
and to preserve desired protection levels. In
emerging markets, some firms emphasize hiring
managers with international work and educational
experience, as this fosters a healthy respect for IP.

International Business: Strategy, Management, and the New 64

Realities
 Managerial Guidelines for Protecting IPR (cont.)

• Include non-compete clauses in employee contracts

for all positions to prevent employees from serving
competitors for up to 3 years after leaving the firm.
• Use contemporary technology to minimize
counterfeiting. For example, many firms include
biotech tags, electronic signatures, or holograms
with their products, to differentiate them from fakes.
• Continuously update technologies and products and
stay one step ahead of counterfeiters. The firm that
updates its products continuously can outwit
counterfeiters by offering products that
counterfeiters cannot imitate, or cannot imitate fast
enough.

International Business: Strategy, Management, and the New 65

Realities