Chapter 10 cont’d

Licensing and Franchising

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 License
• contract whereby licensor allows
temporary use of technology, patents,
trademarks, or other proprietary
advantages to a licensee for a fee

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 Why use Licensing?
- less expensive market entry
- less time and risk if firm doesn’t have
financial, managerial resources or
international knowledge to export or invest
- useful way to test market
- market too small to justify direct effort
- host country restrictions on imports or FDI
- technology feedback from licensee possible
- lower manufacturing costs in foreign country
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Risks associated with Licensing
- may lose technology and create a
competitor
- host country may have poor intellectual
property protection
- damage to reputation by poor
quality/ethics of licensee
- less profits than exporting or FDI
- difficult to enforce agreement
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 Costs of Licensing
- protection of intellectual property
- establishing and maintaining the
agreement
- opportunity costs

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 Negotiating the Agreement
ensure licensing is your best option
- understand your capability and needs
- carefully choose the best potential licensee
- consult lawyers in your country and host country before starting
- if exchanging confidential info during negotiations, protect yourself
by having parties sign confidentiality agreement”
- draft “memorandum of understanding” (MOU) which:
- clarifies negotiations
- bars either party from entering into
negotiations with other firms,
- sets timetable for completing
negotiations

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 The Agreement
- description of parties
- purpose of agreement
- roles of parties
- defined terms - technology, patents, etc.
- set of schedules - technical specs etc.
- nature of rights being granted:
- territory
- any exclusive rights
- rights to sub-license
- duration of agreement
- rights to technology improvements
- rights to technology flowback
- royalties, payments, timing, currencies
- protection of technology
- minimum performance requirements
- settlement of disputes

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 Franchising
a form of licensing in which franchisor
grants to franchisee rights to a
complete business concept, including
a trademark. Franchisee provides own
capital and owns their own business.

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 Reasons for Franchising
- franchisors - rapid market penetration at
low cost, increased cash flow from
franchising fees, economies of scale

- franchisees - proven products or concepts,

recognizable brands, established business
procedures, assistance from franchisor

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 The Agreement
- most terms similar to license agreement
- more emphasis on strict compliance by
licensee to requirements of licensor
- retention of franchise tied to performance
standards

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 Legal Issues With Licensing,
Franchising
- territory restrictions often illegal
- EU - max territory restriction - 5 years
( parallel imports allowed through “passive sales)
- customer limitations often illegal
- minimum or maximum terms ( e.g. 3 - 30 years)
- licensor’s product liability - mandatory
- confidentiality agreements may be illegal
- compulsory grant backs of licensee improvements
may be illegal
- “tied” purchasing - may be illegal
- price fixing ( licensor sets sales price) - illegal
- royalty payments may be restricted
i.e. - % of sales, annual fee, ceiling
- royalty payments by subs to HQ often restricted
(illegal under NAFTA)

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• But somehow –

Franchising is enormously popular around

the world

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