Discuss the advantages of licensing and franchising. In what situations is each of these strategies most appropriate?

Question

What will be an ideal response?

Answer 1

Student answers will vary but should show accurate knowledge of the processes required for licensing and franchising. International licensing is an arrangement by which a licensee in another country buys the rights to manufacture a company's product in its own country for a negotiated fee (typically royalty payments on the number of units sold). The licensee then puts up most of the capital necessary to get the overseas operation going. The advantage of licensing is that the company need not bear the costs and risks of opening up an overseas market. However, a problem arises when a company licenses its technological expertise to overseas companies. For example, the licensee company could copy the technology and use it to enter the U.S. market. In franchising, the company sells limited rights to use its brand name in return for a lump-sum payment and a share of the franchisee's profits. Unlike most licensing agreements, the franchisee has to agree to abide by strict rules regarding how it does business. The advantages of franchising as an entry mode are similar to those of licensing. The franchisees put up capital and assume most of the risk. However, local laws can limit this advantage.