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Objectives
Contractual entry strategies
Licensing as an entry strategy
Advantages and disadvantages of licensing
Franchising as an entry strategy
Advantages and disadvantages of franchising
Other contractual entry strategies
Guidelines for protecting intellectual property
Foundation Concepts
• Contractual entry strategies in international business:
Entering a formal agreement with a distributor, joint
venture firm, or other partner abroad
- Often involves granting permission to a foreign
partner to use intellectual property
• Intellectual property
Ideas or works created by firms or individuals, such as
patents, trademarks, and copyrights
- Includes knowledge-based assets of the firm or
individuals such as industrial designs, trade secrets,
inventions, works of art, literature, & other “creations
of the mind”
Foundation Concepts
• 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
Two Types of Contractual Entry Strategies
Examples of Contractual Relationships
• Bristol-Myers Squibb entered a cross-licensing agreement
with IMCOR Pharmaceutical Co. to produce medications
for ultrasound patients. Pharmaceutical firms enter
countless such cross-licensing agreements
• Subway has over 38,000 stores in 90 countries around the
globe, often halal menus in Muslim countries, gluten-free
bread, and other customized variations
• 7-Eleven has some 37,000 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
Examples of Contractual Relationships
• Governed by a contract that provides the focal firm a
moderate level of control over the foreign partner
- Control reflects the ability of the 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, know-how, and
trademarks
Unique Aspects of Contractual Relationships
• Can be pursued independently or with other foreign
market entry strategies, such as FDI and exporting
• They provide dynamic, flexible choice
Firms can switch from a contractual approach to an
ownership-based approach (e.g., Coca-Cola)
• They allow the focal firm to blend in
Aligning with a local firm can blunt criticism and lessen
attention/criticism
• They generate a consistent level of earnings
They are less susceptible to volatility & risk
Aspects of Contractual Relationships (cont.)
• A patent provides the right to prevent others from using an
invention for a fixed period of time. It is granted to anyone
who invents a new process, product, or useful
improvement
• A trademark is a distinctive design or symbol that
identifies a product or service; e.g., Nike’s swoosh symbol
• A copyright protects original works of authorship; it
typically covers works of music, art, literature, movies, or
software
Typical Types of Intellectual Property
• An industrial design describes the features of a product &
improve look and usability (e.g., Apple iPod)
• Trade secret – confidential information that has
commercial value (e.g., formula for Coca-Cola)
• A collective mark – a logo that belongs to a group used to
identify them & marks the quality or accuracy of a product
(e.g., UL – Underwriter’s Laboratory)
• A geographical indicator – name or sign that denotes a
specific region/location (e.g., Florida oranges, Champagne,
etc.)
Types of Intellectual Property (cont.)
Intellectual Property Rights
• The legal claim through which the proprietary assets of
firms & individuals are protected from unauthorized use
by others
• Provide inventors with a monopoly advantage for a
specified period of time so they can use their inventions to
create commercial advantage
• Without legal protection & commercial rewards, firms
and individuals would have little incentive to invent
• Availability & enforcement of these rights vary
considerably across countries
Licensing
A licensing agreement specifies the nature of the
relationship between the licensor (owner of intellectual
property) and the licensee (the user).
Examples
Intel licensed the right to a new process for manufacturing
computer chips to German firm
Warner licenses Harry Potter images to companies
worldwide.
Disney licenses the right to use its cartoon characters in
producing shirts and hats to clothing manufacturers in Asia.
Licensing (cont.)
• Typically the licensee pays the licensor a fixed amount
upfront & an ongoing royalty (~ 2–5%) on gross sales
generated from using the licensed asset
• The fixed amount covers the licensor’s initial costs
of transferring the asset to the licensee, including training,
engineering, or modification
• Certain types of licensable assets, such as copyrights &
trademarks, have much lower transfer costs
• Typical contract runs from 5-7 years & is renewable
International Licensing is Fairly Common
• Planters and Sunkist are owned by U.S. firms and sold
in Britain and Japan via licensing agreements
• 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
• Swiss-based Nestle sells its Kit Kat chocolate bars in the
U.S. by license to Hershey
• A review of 120 of the largest multinational food
companies showed that half are involved in some form
of international product licensing
Trademark Licensing
• Granting to another firm to use proprietary names,
characters, or logos for a specified period of time in
exchange for a royalty
• Trademarks appear on clothing, food, toys, home
furnishings, and numerous other goods and services
- Coca Cola, Harley-Davidson, Polo, Disney
• Harry Potter trademark generates millions for the
owner, with little effort. U.S. firms trademark-licensing
revenues exceeding $100 billion annually.
Copyright Licensing
• A copyright gives the owner exclusive right to
reproduce art, music, literature, & software, as well as
to prepare derivative works, distribute copies, or
perform the work publicly
• The term of protection varies by country, but the
creator’s life plus 50 years is typical
• Many countries offer little or no copyright protection
• Thus, it is wise to investigate local copyright laws
before publishing a work abroad
Know-How Licensing
• Involves 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
• Cross-licensing – acquisition of IP among firms in similar
industry; common in tech & pharma industries
Franchising as an Entry Strategy
• Most typical arrangement is business format franchising -
a 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 longer-term than licensing
• Master franchiser: An independent company authorized to
establish, develop, and manage the entire franchising
network in its market
• E.g., McDonald's in Japan or India
Managerial Guidelines for Licensing and Franchising
• Licensing and franchising are complex undertakings,
requiring skillful research, planning, and execution
• The firm must research in advance the host country's
laws on intellectual property rights, repatriation of
royalties, and contracting with local partners
• Key challenges include:
• Establishing which national law takes precedence for
the contract
• Deciding whether to grant an exclusive or nonexclusive
arrangement
• Determining the geographic scope of territory to be
granted to the foreign partner
• Finding right partner/developing local supply chains
Other Contractual Arrangements
• Turnkey contracting: Arrangement where a firm plans,
finances, organizes, and implements all phases of a
project abroad; handed over to a foreign country after
training local personnel. Typical in construction &
engineering industries
• Build-Operate-Transfer (BOT): a firm contracts to
build a major facility abroad (e.g., a dam), operates it for
a time, & then transfers ownership to the project sponsor
(e.g., host government)
Other Contractual Arrangements (cont.)
• Management contract: A contractor supplies managerial
know-how to operate a hotel, resort, airport, hospital, or
other facility in exchange for compensation
• International leasing: The lessor rents out machinery or
equipment to clients abroad, often for several years at a
time. E.g., airlines lease aircraft
Internationalization by Professional Service Firms
• Professional services (e.g., accounting, engineering, legal,
and IT) have grown globally over the last 3 decades
• Challenges include:
Need for recognition of credentials across borders
(e.g., CPA, Law, Medicine)
Need for employment visas
High need for language and cultural skills because of
strong involvement with service client
• Firms typically enter foreign market via
direct investment & contractual strategies
(e.g., agent or representative)
Counterfeiting
• Total value of counterfeit & pirated goods traded
internationally exceeds U.S. $600 billion (roughly 5% of
U.S. GDP)
• “Knockoffs” include clothing, fashion accessories,
watches, medicines, and appliances
• While companies such as Rolex, Louis Vuitton, & Tommy
Hilfiger are well-known victims, counterfeiting is
widespread even in industrial products
• Other examples are pharmaceutical products, medical
devices, and car parts
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)
Guidelines for
Safeguarding Intellectual Property
• Understand local IP laws and enforcement levels
• Register IP in each country where firm does business
• Ensure that agreements provide for IP oversight
• Pursue IP infringers in court
• Monitor intermediaries and partners for infringements
• Require partners to report violations
• Use security systems for facilities & computer systems
• Include non-compete clauses in contracts
• Lobby local governments for enforcement