Through licensing, a firm (licensor) grants a foreign entity (licensee) some type of intangible rights, which could be rights to process, a patent, a program, a trademark, a copyright or an expertise. In essence, the licensee is buying the assets of another firm in the form of know-how R &D.
Advantages of Licensing
Licensing provides advantages to both parties. The licensor receives profits in addition to those generated from operations in domestic markets. These profits may be additional revenues from a single process or method used at home that the manufacturer is unable to utilize abroad. The method or process could have the beneficial effect of extending the life cycle of the firm’s product beyond that which it would experience in local markets.
Additional revenues could also represent a return on a product or process that is ancillary to the strategic core of the firm in its domestic market; that is, the firm could have developed a method of production that is marketable as a separate product under a licensing agreement. In addition by licensing the firm often realizes increased sales by providing replacement parts abroad. Also it protects it self against piracy by having an agent (the licensed user) who watches for copyright or patent infringement. The licensee benefits from acquiring the rights to a process and acquires state-of-art technology while avoiding the R & D costs.
Disadvantages of Licensing
The prime disadvantage of licensing to the licensor is that it limits future profit opportunities associated with the property by tying up its rights for an extended period of time. Additionally, by licensing these rights to another, the firm loses control over the quality of it’s products and processes, the use or misuse of the assets and even the protection of its corporate reputation.
To protect against such problems, the licensing agreement should clearly delineate the appropriate use of the process, method or name as well as allowable market and reexport parameters for the licensee. The contract should also stipulate contingencies and resource, should the licensor or licensee fail to comply with its terms.
Franchising is similar to licensing, except that in addition to granting the franchisee permission to use a name, process, method or trademark, the firm assists the franchisee with the operations of the franchise or supplies raw materials or both. Franchisee pays an initial fee and a proportion of it’s sales or revenue to the franchising firm.
Ex – KFC, McDonald’s, Hilton, Holiday Inn etc.
Advantages and disadvantages of franchising
The advantages accruing to the franchisers are increased revenues and expansion of its brand name identification and market reach. The greatest disadvantage, as with licensing is coping with the problems of assuring quality control and operating standards. Other difficulties with franchises come with their need to make slight adjustments or adaptations in the standardized product or service.
Reference : International Business by Karel Cool