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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
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Advantages of licensing
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
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Advantages of licensing
Firm has some intangible asset that has other business applications, but firm does not want to develop those applications itself
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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
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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
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Advantages of franchising
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
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.
Summer School, Mg211
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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
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Example
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Disadvantages of franchising
Sometimes, firms set up a subsidiary (or master franchise) in each country they expand to, with the goal to oversee local franchisees
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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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Benefiting from local knowledge of domestic partner Risk-sharing In some cases/countries, political benefits
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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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