Page 90 - DMGT546_INTERNATIONAL_TRADE_PROCEDURE_AND_DOCUMENTATION

Unit 4: Export Marketing – Going Global

4.5.2 Licensing Notes

Licensing does not have to be an international arrangement. Licensing may take place completely
within one country. But, it is also a convenient way for a company to spread its products abroad
with minimal risk.
Licensing is an arrangement whereby a firm (the licensor) grants a foreign firm (the licensee)
the right to use intangible property such as a patent, logo, formula, process, etc. The licensee
pays a royalty or percent of the profits to the licensor. Licensing allows a business to go global
relatively rapidly and simply. Rather than trying to export a product directly, incurring shipping
costs and delays, among other barriers, a company can license their methods of doing business
to a foreign organization.

Example: rather than blend and bottle a soft drink here and then ship overseas, a company
may license a foreign bottler who produces the soft drink locally using the licensed formula.
This may also allow some adaptation to local tastes and customs.

4.5.3 Franchising
Franchising also does not have to be an international arrangement. Franchising may take place
completely within one country. There are many examples of nationally-based franchises with
which we are sure you are familiar. It is also another convenient way for a company to introduce
its products abroad with minimal risk.
Franchising is a form of licensing in which the parent company (franchisor) offers some
combination of trademark, equipment, materials, managerial guidelines, consulting advice,
and cooperative advertising to the investor (franchisee) for a fee and/or percentage of revenues
(royalties). As with licensing, franchising allows a business to go global relatively rapidly and
simply, however, franchising generally requires a greater commitment, financially and
otherwise, than licensing by both parties. The most obvious example is the ubiquitous McDonald’s
franchise. Some other examples are Starbucks or hotel chains such as Hilton. Franchising may
also allow some adaptation to local tastes and customs.

4.5.4 Foreign Direct Investment

Foreign direct investment occurs when a company invests resources and personnel to build or
purchase an operation in another country. This turns the firm into a multinational company (MNC).
A wholly owned subsidiary is a firm that is owned 100% by a foreign firm
This is a major decision for an organization because costs and risks of direct investment are
greater than with franchising or licensing. Although governments usually welcome foreign
direct investment, they are also often concerned about this type of investment for several reasons.
Due to their size, MNCs may influence the host country’s economic and political systems.
Control of a country’s important resources may pass into the hands of foreign corporations and,
perhaps, then governments. Some countries enact programs to counteract these concerns.

4.5.5 Joint Ventures and Strategic Alliances

Joint ventures and strategic alliances are somewhat different from foreign direct investment in
that we are not talking about creating wholly owned subsidiaries. Yet, they can be excellent,
strategic ways to penetrate different global markets around the world while limiting exposure
at the entry phase.

LOVELY PROFESSIONAL UNIVERSITY 85