Licensing and Franchising

Licensing

Licensing is a contractual arrangement in which one firm grants another firm in a foreign country access to its patents, trade secrets or technology in return for a fee called royalty.

• The firm that grants the permission is the licensor; the foreign firm that acquires the rights to use the technology or patents is the licensee.
• It is not only technology that is licensed — in the fashion industry, for instance, designers license the use of their names.
• Sometimes there is a mutual exchange of knowledge, technology and/or patents between the two firms, which is called cross-licensing.

Franchising

Franchising is very similar to licensing, with two key differences:

• Licensing is used for the production and marketing of goods, whereas franchising applies to the service business.
• Franchising is more stringent: franchisers set strict rules on how franchisees must operate.

Apart from these, franchising works much like licensing — one party grants another the right to use its technology, trademark and patents for an agreed payment over a set period. The parent company is the franchiser and the other party the franchisee. A franchiser can be any service provider — a restaurant, hotel, travel agency, bank, wholesaler or retailer — that has developed a unique technique for creating and marketing services under its own name and trademark. It is this uniqueness that gives the franchiser an edge and attracts would-be service providers. Several leading fast-food and retail chains operate worldwide through franchising.

Advantages

• The licensee/franchiser sets up the business unit and invests its own money, so the licensor/franchiser makes virtually no investment abroad — a less expensive way to go international.
• With little foreign investment, the licensor/franchiser is not exposed to the losses of the foreign business; it is simply paid a royalty or fee (a percentage of production or sales) as long as production and sales continue.
• Since a local person manages the foreign business, there is lower risk of takeover or government intervention.
• The local licensee/franchisee brings market knowledge and contacts that help the licensor/franchiser market successfully.
• Only the parties to the agreement may legally use the licensor's/franchiser's copyrights, patents and brand names in the foreign market, so other firms cannot use them.

Limitations …