Other Modes of Entry

Licensing Franchising Joint ventures

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Licensing

Licensor: grants the rights to intangible property (patents, inventions, formulas, processes, designs, copyrights, trademarks) for a specified time period Licensee: pays a royalty fee

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Advantages of licensing

The licensee puts up most of the capital necessary to get the foreign operation going
Firm does not have to bear the development

costs and risks associated with opening a foreign market.

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Advantages of licensing

Licensing is good option when:

Exporting is not viable

Because trade costs are too high Because of unfamiliarity with the foreign destination Because a foreign subsidiary would stretch the management resources too thin Because political environment in foreign country is too uncertain

Owning foreign subsidiary is too risky

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Advantages of licensing

Licensing is good option also when:

Firm has some intangible asset that has other business applications, but firm does not want to develop those applications itself

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Harry Potter licences (Warner Bro.)

LEGO Electronic Arts (video game software) Mattel Goodwin Weavers (wall hangings, decorative pillows, pillow buddies)

P.J. Kids (loft beds) Jelly Belly Candy (HPs favourite candy, in flavours like earwax, sardine, vomit) Overall, licence value of HP estimated to be over $1 billion.

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Disadvantages of licensing:

Little control over supply Asset dissipation caused by passing on privately known procedures and production processes to licensees

Licensees may leak or appropriate that information. Classic example: American RCA licensing colour TV technology to Japanese Matsushita and Sony.

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Franchising

Specialized form of licensing, typically involving longer-term commitments and stricter rules for franchisee

Often used by service firms

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Franchising

Franchisee: pays royalty (often a share of its revenues) and agrees to abide by strict rules in conducting the business Franchiser: sells right to use intangible property and assists the franchisee on how to run the business

For example, in sales promotions, training, central purchasing of key inputs

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Global purchase of mozzarella in New Zealand for use worldwide

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Advantages of franchising

Just as with licensing:

Firm avoids costs and risks involved in owning and managing foreign subsidiaries.

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Disadvantages of franchising

Challenges to maintaining value of firms intangible assets, such as its brand name

Quality control. Regardless of its actions, benefits from brand recognition of the firm; Has the option to lower cost by reducing quality.

Franchisee:

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Example

Chain with N units worldwide Each franchisee:

Benefits from global brand recognition, V But could benefit also by lowering cost and quality

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Example

If franchisee i chooses high quality, its profits are: If franchisee i chooses low quality, its profits are: But obviously, franchisees choices of quality affect value of the brand, V.
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Example

Value of the brand depends on the proportion of franchisees that chooses high quality:

where

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Example

If all choose high quality, V = 100 and each franchisees profit is

If all choose low quality, V = 0 and each franchisees profit is

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Example

What is the best choice for each franchisee?

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Disadvantages of franchising

Franchiser must monitor franchisees effectively

Especially difficult when franchisees are spread through many countries.

Sometimes, firms set up a subsidiary (or master franchise) in each country they expand to, with the goal to oversee local franchisees

Subsidiary can be wholly owned or a joint venture.

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Joint venture

A firm that is jointly owned by two independent firms A common way of entering a foreign market Need not be with a local firm

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Advantages of joint ventures

Benefiting from local knowledge of domestic partner Risk-sharing In some cases/countries, political benefits

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Disadvantages of joint ventures

Only partial control over production and strategy of the venture Your partners will have access to your technology and know-how Potential for conflict and battles for control

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Entry in a foreign market with partners (licensing, franchising, JV) attractive when:

Intellectual property is strong in the foreign country. Commercial law and contract enforcement regime are stable in the foreign country. Foreign countrys market is sufficiently large and/or has high growth prospects. Exporting is too costly, FDI is too risky.

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