Licensing and Franchising: Strategies for Global Expansion

This report elucidates the concepts of licensing and franchising, examining how organizations leverage these models to enhance shareholder value and generate revenue. It delves into the rationale behind selecting either licensing or franchising, contrasting these approaches with foreign direct investment. The report highlights the advantages and disadvantages inherent in both licensing and franchising agreements, emphasizing the importance of mitigating potential risks. Licensing involves granting permission to manufacture products in exchange for payment, while franchising entails granting the right to produce and distribute goods and services. Organizations pursue these routes to increase market share and revenue, accessing multiple income streams with reduced costs. However, limitations exist, such as potential loss of control in licensing and restrictions on business operations in franchising. Mitigation strategies include performance tracking, compliance monitoring, and thorough risk assessment. The report concludes that both methods have unique benefits and drawbacks, necessitating careful consideration of circumstances and proactive risk management.

Running head: LICENSING AND FRANCHISING
Licensing and franchising
Name of the Student
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LICENSING AND FRANCHISING
Table of Contents
Introduction:...............................................................................................................................3
Discussion:.................................................................................................................................3
Explaining the essential features of licensing:...........................................................................3
Explaining the essential feature of franchising:.........................................................................3
Difference between licensing and franchising:..........................................................................3
Reasons for pursuing this route to generate shareholder value and revenue for organization:..3
Illustration of company wishing to expand its international business through licensing model:
....................................................................................................................................................3
Illustration of company wishing to expand its international business through franchising
model:.........................................................................................................................................3
Limitations of financing agreements:.........................................................................................3
Limitations of licensing agreements:.........................................................................................3
Mitigations of limiting the risks:................................................................................................3
Conclusion:................................................................................................................................3

LICENSING AND FRANCHISING
Introduction:
The report is prepared for explaining the concept of franchising and licensing and
how the model is used by organization to increase the value of shareholder and generating
revenue. The reasons of organization choosing the licensing or franchising model and
whether they use foreign direct investment through such model have been explained. The
limitations to the benefits and risks associated with each of the agreements have been
demonstrated in the report.
Discussion:
Explaining the essential features of licensing:
 Licensing is an arrangement under which one company has the permission of
manufacturing the products of products of other company in return of specified
amount of payment. It is the permission that is granted to any business for using
trademarks, patents, and technology and property rights (Burstein and Vogel 2017).
 The essence of licensing is that the ownership of property is retained by the owner
while granting the right to use it at the same time.
Explaining the essential feature of franchising:
 Franchising is an arrangement where franchisee has the right to produce and distribute
goods and services of franchisor. It is a business strategy that can be used to capture
the share of market. Hence, the franchisor retains the degree of control.
 Under franchise as a part of the agreement, the total business format tends to pass on
to the franchisee.

LICENSING AND FRANCHISING
Difference between licensing and franchising:
Licensing Franchising
Franchising is an agreement that is usually
adopted by the start up business.
Licenses are taken up by the business that is well
established.
License does not have any attached goodwill and
it is the licensor who totally retains it.
The main goodwill is retained by the franchisor
and element of localized goodwill is taken up by
the franchisee.
Licensing is normally governed by the contract
law.
Franchising is governed by company law and
franchising regulations.
Reasons for pursuing this route to generate shareholder value and revenue for
organization:
An organization entering into licensing and franchising agreement is able to take
advantage in the form of increasing share of market that helps in increasing the revenue of
business. Any business intending to break into the profitable market has the advantages of
entering into such agreements. Such agreements provides enticing benefits to the business as
they are able to access multiple revenue streams without any underlying cost which
ultimately helps in increasing the income generated and generating the value to shareholders.
Illustration of why company wishes to expand its international business through
licensing model:
In case of companies expanding internationally using FDI, allowing the foreign
ownership of companies might lower the comparative advantage of nation and the business
might be stripped of its value. Moreover, the unprofitable portion might be sold to less
sophisticated investors and the collateral of the foreign company can be used to get loan at

LICENSING AND FRANCHISING
lower cost and refunding the funds to the parent company instead of reinvesting it (Rosado et
al, 2018). In attributable to these facts, it would be suitable to expand the business using
licensing model.
Illustration of why company wishes to expand its international business through
franchising model:
Organizations using franchising model for international expansion is able to
streamline the process by enabling them to enter the foreign markets efficiently. Compared to
other expansion models, the model of franchising is considered to be most effective. On other
hand, foreign direct investment might be more expensive and exporting of goods might
require companies to incur additional cost. There are structural options under the model of
franchising that would make international expansion using franchising model more efficiently
for both the parties.
Limitations of franchising agreements:
 There are certain restrictions imposed on how the business under licensing agreement
can run and changes are difficult to make according to the local market.
 Franchisee is required to share all the profits as a percentage of sales with the
franchisor. This leaves franchisee with lower amount of profits (Hoffman et al. 2016).
 Franchising model usually comes with inflexible nature that makes it difficult for
franchisee to contribute to growth of business development by making changes.
 The initial cost of entering in the franchise might be higher than expected due to
management service fees and initial cost of buying franchise (Emerson and Willis
2017).

LICENSING AND FRANCHISING
Limitations of licensing agreements:
 Under licensing, it is certainly possible that firm might lose control over the
marketing and manufacturing of goods to other countries in event of international
expansion.
 One of the downsides to the licensing agreement is that such agreement relies on the
ability of licensee to commercialize the patent effectively (Correa and Yusuf 2016).
 The quality management under such agreement can be poor that might result in
damaging the reputation of product or brand.
Mitigations of limiting the risks:
 The performance of business should be tracked to evaluate the effectiveness so that
any warning signs can be identified at earliest.
 Any changes in the software compliance should be followed using a top down
approach which would indicate that there is string focus of management.
 Reporting and delivery of compliance under the license agreement should be
automated by deploying technologies and tools (Coşar and Fajgelbaum 2016).
 All the advantages and disadvantages along with the opportunities should be assessed.
In addition to this, professional advice should also be sought prior to making any
decision.
 Risks related to intellectual property can be reduced by embracing need to know as
the process is not focused by the potential client.
 It is essential for franchise to communicate with the franchisor as it is essential for
former to comply with the way of doing things with the franchise (Solberg 2017).

LICENSING AND FRANCHISING
Conclusion:
With the above listed facts about franchising and licensing, it can be inferred that both
the methods of business agreements have their own advantages and disadvantages. There
exist considerable difference between franchising and licensing and it is in certain specific
circumstances that the business prefers such agreements compared to foreign direct
investment. However, there are some downsides of licensing and franchising which can be
overcome by adopting the mitigating measures that has been discussed above.

LICENSING AND FRANCHISING
References list:
Burstein, A. and Vogel, J., 2017. International trade, technology, and the skill
premium. Journal of Political Economy, 125(5), pp.1356-1412.
Correa, C.M. and Yusuf, A. eds., 2016. Intellectual property and international trade: the
TRIPs agreement. Alphen aan den Rijn: Wolters Kluwer.
Coşar, A.K. and Fajgelbaum, P.D., 2016. Internal geography, international trade, and regional
specialization. American Economic Journal: Microeconomics, 8(1), pp.24-56.
Emerson, R.W. and Willis, C.R., 2017. International Franchise Trademark Registration:
Legal Regimes, Costs, and Consequences. Wake Forest L. Rev., 52, p.1.
Emerson, R.W. and Willis, C.R., 2017. International Franchise Trademark Registration:
Legal Regimes, Costs, and Consequences. Wake Forest L. Rev., 52, p.1.
Hoffman, R.C., Munemo, J. and Watson, S., 2016. International franchise expansion: the role
of institutions and transaction costs. Journal of International Management, 22(2), pp.101-
114.
Rosado-Serrano, A., Paul, J. and Dikova, D., 2018. International franchising: A literature
review and research agenda. Journal of Business Research, 85, pp.238-257.
Solberg, C.A., 2017. International Marketing: Strategy development and implementation.
Routledge.