Page 104 - Introduction to Business

78 PART 1 The Nature of Contemporary Business

to participate in the export-import business, competition is generally keen and the
profit margins may not be very high.

Licensing and Franchising
In international trade, the relationship between the exporter and the importer is
at arms length; that is, the two parties may not even know or meet with each
other. Merchandise is shipped and payment is received; it is that straightforward.
However, in licensing and franchising, the relationship with the overseas partner
is closer. The company that is providing the license or franchise will need to prop-
erly evaluate, understand, and trust the overseas partner, since those relation-
ships generally last for several years, if not longer. Licensing and franchising
licensing The practice in which a involve slightly more risk than pure international trade business. In licensing, a
company or individual provides the company or individual provides the foreign partner the technology (patented
foreign partner the technology
(patented technology, copyright, technology, copyright, process, trademark, etc.) to manufacture and sell its prod-
process, trademark, etc.) to ucts in return for an annual license fee. The license fee could be based on a per-
manufacture and sell products or centage of final sales revenue or the number of units sold. The understanding is
services for an annual license fee
that the foreign partner will use the patented technology as agreed to produce
and sell products that meet the licensor’s standards (to avoid sales of substandard
products, which could ruin the licensor’s global reputation). For example, when
Mercedes Benz provided Tata (a major industrial group in India) a license to man-
ufacture Mercedes-Benz trucks, Tata agreed to maintain quality control to Mercedes-
Benz specifications and also to provide a license fee depending on sales volume.
Drug manufacturers like Merck, Eli Lilly, Aventis, and so on frequently license
their technology to foreign firms (e.g., Ranbaxi in India) for a fee to produce cer-
tain drugs and sell them in the local market. Why do firms license their technol-
ogy to foreign partners rather than export the drug to the country or manufacture
the product overseas themselves? The reason is quite simple. If the market for a
particular drug in a country is huge, it may make sense to manufacture the prod-
uct there (to take advantage of lower labor and raw material costs) rather than
depend on exports. Also, the licensor may not have the resources needed for mak-
ing the overseas investment in plant and equipment or the licensor may have better
uses for those resources. At times, a firm may provide its license to a foreign part-
ner to manufacture and sell the patented product not only locally but also to
other countries in the region as well. A major point of concern to the licensor is
the fact that at times unscrupulous licensees may manufacture the licensed prod-
uct and sell it under a different brand name. In this case, the licensor will lose
some of the patent fees (because of sales diversion) and sales (because of compe-
tition from the local brand).
franchising The practice in which a firm Franchising, on the other hand, obligates the parent firm to provide special-
is obligated to provide specialized ized equipment and/or service (e.g., product, price, promotion, and distribution
equipment and service support (e.g., strategy), and even some seed money, to the foreign franchisee in return for an
training, product, price, promotion, and
distribution strategy), and at times even annual fee. The fast-food industry is best known for franchises, domestically and
some seed money, in return for an internationally. Some of the well-known fast-food franchises include McDonald’s,
annual fee from the franchisee
Burger King, Pizza Hut, Domino’s, Popeye’s, KFC, and Subway. Most of these
franchises, domestically and internationally, are owned and operated by local
residents who generally obtain capital locally. As in the case of licensing, fran-
chising essentially leads to penetration of international markets without signifi-
cant capital investment abroad. In return for the franchise fee, the fast-food
franchisee receives help in the layout of the outlet, the equipment that is required
to run the operation, training on how to manage the franchise, and so on, so that
customers visiting a McDonald’s outlet in Australia, for example, can expect to

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