Page 198 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

Unit 12: Foreign Market Entry and Country Risk Management

Notes
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Caution Licensing takes several forms. Licences may be granted for production processes,
for the use of a trade name or for the distribution of imported products. Licences may be
closely controlled or be autonomous, and they permit expansion without great capital or
personnel commitment if licensees have the requisite capabilities. Not all licensing
experiences are successful because of the burden of finding, supervising and inspiring
licensees.

Franchising

Franchising is a rapidly growing form of licensing in which the franchiser provides a standard
package of products, systems and management services, and the franchisee provides market
knowledge, capital and personal involvement in management. The combination of skills permits
flexibility in dealing with local market conditions and yet provides the parent firm with a
reasonable degree of control. The franchiser can follow through on marketing of the products to
the point of final sale. It is an important form of vertical market integration. Potentially, the
franchise system provides an effective blending of skill centralisation and operational
decentralisation, and has become an increasingly important form of international marketing. In
some cases, franchising is having a profound effect on traditional businesses. In England, for
example, it is estimated that annual franchised sales of fast foods is nearly 1.8 billion
($2 billion), which accounts for 30 per cent of all foods eaten outside the home.

There are three types of franchise agreement used by franchising firms – master franchise, joint
venture and licensing – any one of which can have a country’s government as one partner. The
master franchise is the most inclusive agreement and the method used in more than half of the
international franchises. The master franchise gives the franchisee the rights to a specific area
(many are for an entire country) with the authority to sell or establish sub-franchises. The
McDonald’s franchise in Moscow is a master agreement owned by a Canadian firm and its
partner, the Moscow City Council Department of Food Services.

Joint Ventures

Joint Ventures (JVs), one of the more important types of collaborative relationship, have
accelerated sharply during the past 20 years. Besides serving as a means of lessening political
and economic risks by the amount of the partner’s contribution to the venture, joint ventures
provide a less risky way to enter markets that pose legal and cultural barriers than would be the
case in the acquisition of an existing company.

Local partners can often lead the way through legal mazes and provide the outsider with help in
understanding cultural nuances. A joint venture can be attractive to an international marketer:
1. When it enables a company to utilise the specialised skills of a local partner

2. When it allows the marketer to gain access to a partner’s local distribution system
3. When a company seeks to enter a market where wholly owned activities are prohibited
4. When it provides access to markets protected by tariffs or quotas, and

5. When the firm lacks the capital or personnel capabilities to expand its international activities.

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