Chapter 15 Licensing Franchising and other Contractual Strategies

Chapter 15 Licensing, Franchising and other Contractual Strategies International Business Strategy, Management & the New Realities by Cavusgil, Knight & Riesenberger International Business: Strategy, Management, and the New Realities 1

Foundation Concepts Cross-border contractual relationships: Entering a formal agreement with a foreign distributor, joint venture firm or other partner abroad. Often involves granting permission to use intellectual property to a foreign partner. 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’. International Business: Strategy, Management, and the New Realities 2

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: an arrangement in which the firm allows another the right to use an entire business system in exchange for fees, royalties or other compensation. International Business: Strategy, Management, and the New Realities 3

Contractual Relationships are Fairly Common • Pharmaceutical firms engage in cross-licensing practices in which they exchange scientific knowledge about producing products and distribution rights. • Service firms in retailing, fast food, car rentals, television programming, and animation rely on licensing and franchising agreements. • 7 -Eleven is 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. operate via licensing or franchising agreements. International Business: Strategy, Management, and the New Realities 4

Unique Aspects of Contractual Relationships • Governed by a contract that provides the focal firm moderate level of control over the foreign partner. Control refers to the ability of the focal 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 and know-how. • Can be pursued independently or in conjunction with other foreign market entry strategies. Contractual relationships may accompany and support FDI and exporting. International Business: Strategy, Management, and the New Realities 5

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. Can cover any new product, process, machine, or improvement. • A trademark is a distinctive design, symbol, logo, word, or series of words placed on a product label, which identifies a product or service as coming from a common source. E. g. , British Petroleum’s ‘BP’ acronym, Mc. Donald's golden arches, Nike’s swoosh symbol. • A copyright protects original works, giving the creator the exclusive right to reproduce the work, display and perform it publicly, and to authorize others to do these activities. Can cover works from music, art, literature, films, and software. International Business: Strategy, Management, and the New Realities 6

Types of Intellectual Property (cont. ) • An industrial design refers to the appearance or features of a product. The thin Apple i. Pod with the company logo is a well-known example. • 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 Realities 7

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. International Business: Strategy, Management, and the New Realities 8

International Licensing is Fairly Common • Peter Paul Mounds and Almond Joy are owned by the British food firm Cadbury Schweppes and produced in the U. S. via a licensing agreement with Hershey Inc. • Planters, Sunkist, and Budweiser are owned by U. S. firms and sold in Britain and Japan via licensing agreements with local firms. • 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. International Business: Strategy, Management, and the New Realities 10

Main Advantages and Disadvantages of Licensing Advantages for licensor • Low investment • Low involvement • Low effort, once license is established • Low-cost initial entry strategy Disadvantages for licensor • Performance depends on the licensee • Licensor has limited control over its asset(s) abroad • Risks creating a future competitor. International Business: Strategy, Management, and the New Realities 12

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 generally longer-term than licensing. • Master franchiser is an independent company authorized to establish, develop, and manage the entire franchising network in its market. E. g. , Mc. Donald's in Japan. International Business: Strategy, Management, and the New Realities 13

The Role of the Franchisor and the Franchisee Franchisor: • provides vital assets • has economies of scale, a wealth of intellectual property, and know-how about its own industry Franchisee: • performs local functions in foreign markets, such as marketing and distribution, that the franchisor usually cannot perform. • has entrepreneurial drive, deep knowledge about the local market and how to run a business there. International Business: Strategy, Management, and the New Realities 16

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 firms in the construction, engineering, and architectural services industries. • Under a management contract, a contractor supplies managerial know-how to operate a hotel, resort, hospital, airport, or other facility, in exchange for compensation. • With International leasing, the lessor rents out machinery or equipment to clients abroad, often for several years at a time. E. g. , airlines lease aircraft. International Business: Strategy, Management, and the New Realities 19

Safeguarding Intellectual Property • Contractual arrangements provide only moderate control over foreign partners. • Laws that govern contractual relations are often insufficient abroad. Thus, it is critical to: • Have a strong contract; • Develop close, trusting relationships with foreign partners; • Provide foreign partner with superior resources and strong support. International Business: Strategy, Management, and the New Realities 20

Counterfeiting • Total value of counterfeit and pirated goods traded internationally exceeds U. S. $600 billion, 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. International Business: Strategy, Management, and the New Realities 22

Guidelines for Protecting 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). International Business: Strategy, Management, and the New Realities 23

Guidelines (cont’d) It is critical for the firm to: • Understand local IP laws and enforcement procedures; • Avoid countries with weak IP laws; • Register patents, trademarks, copyrights in each country where the firm does business; • Ensure that licensing and franchising agreements provide for IP oversight; • Pursue IP infringers in court; • Monitor franchisees, intermediaries and partners for asset infringements; • Train employees to protect assets. International Business: Strategy, Management, and the New Realities 24