1. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 12-1 A Framework for International Business by Cavusgil, Knight, & Riesenberger Chapter 12: Licensing, Franchising, and Other Contractual Strategies

2. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 12-2 Learning Objectives In this chapter, you’ll learn about: 1. Contractual entry strategies 2. Licensing as an entry strategy 3. Advantages and disadvantages of licensing 4. Franchising as an entry strategy 5. Advantages and disadvantages of franchising 6. Other contractual entry strategies 7. Guidelines for protecting intellectual property

3. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 12-3 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”

4. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 12-4 Two Types of Contractual Entry Strategies 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

5. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 12-5 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

6. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 12-6 Unique Aspects 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 Can be pursued independently or with other foreign market entry strategies, such as FDI and exporting

7. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 12-7 Aspects of Contractual Relationships (cont.) 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

8. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 12-8 Typical Types of Intellectual Property 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

9. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 12-9 Types of Intellectual Property (cont.) 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.)

10. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 12-10 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

11. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 12-11 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.

12. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 12-12 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

13. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 12-13 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

14. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 12-14 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.

15. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 12-15 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

16. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 12-16 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

17. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 12-17 Leading Licensors Ranked by Licensing Revenues

18. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 12-18 Licensing to the Licensor: Advantages & Disadvantages

19. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 12-19 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

20. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 12-20 Examples of Leading International Franchises

21. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 12-21 Franchising to the Franchisor: Advantages & Disadvantages

22. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 12-22 Franchising to the Franchisee: Advantages & Disadvantages

23. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 12-23 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

24. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 12-24 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)

25. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 12-25 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

26. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 12-26 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)

27. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 12-27 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

28. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 12-28 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)

29. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 12-29 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

30. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 12-30 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.