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Licensing entails a company arranging to sell or grant a licensee the right to produce their products or use their intellectual property or items for royalty. On the contrary, franchising requires the franchisor to authorize a franchisee to use a process, brand name, and business model for a certain feel to do business (Gaitán, 2021). Registration is not required when licensing goods and products but is compulsory during franchising. Items like patented technologies and software are associated with licensing, while franchising entails services like automobile service centers and food chains. Moreover, franchising involves exercising massive control of the service quality and strategies applied in the franchisee’s business (Gaitán, 2021).
However, licensing does not allow autonomy over the right given to the licensee to perform business. Franchising requires the franchiser to offer complete support and training to the franchise but is not a requirement in licensing. Rights or property are transferred once during licensing, whereas franchising entails providing continuous support (Gaitán, 2021). Franchising applies strict rules concerning the franchisee’s business activities, while licensing regulations are less stringent.
Contractual Entry Approaches of Franchising and Licensing
Contractual entry approaches commonly implemented are franchising and licensing. Companies that enter a market using licensing contractual mode gain the right to the owner’s patents, brand, technology, or trademarks (Cavusgil et al., 2016). Aspects specified when making a licensing agreement include the relationship between the licensee and licensor. On the other hand, franchising contractual entry approaches are an advancement of licensing, which allows the franchisee to utilize the franchisor’s entire business components for a specified compensation (Cavusgil et al., 2016). Franchising parties are involved in a continuous relationship likely to last several years. Each entry approach is associated with significant advantages and disadvantages.
Advantages of Licensing Entry Method
Capital investment and the licensor’s direct involvement are not needed when using licensing contractual entry approach. In addition, licensing is associated with lower costs and offering the right to key technology (Cavusgil et al., 2016). Moreover, this approach can be effective when entering restricted or challenging markets that require bureaucratic requirements and tariffs. Licensing helps to limit the entry of competitors by enhancing the company’s brand name in new markets.
Disadvantages of Licensing Entry Method
The risks associated with licensing entry approach include a limited relationship with clients and reduced control of services and products. The licensee relies on contractual enforcement to control their business, which may hinder performance. Remarkably, licensing may result in the creation of future competitors because it involves sharing intellectual property (Cavusgil et al., 2016). For instance, IP knowledge is disclosed to other firms contributing to technology transfer and increased future competition.
Advantages of Franchising Entry Method
The franchising entry approach is also associated with lower capital and increased brand diffusion. Moreover, the franchisee enjoys control over products, operations, and brand marketing (Cavusgil et al., 2016). This enables them to achieve improved performance and expand in diverse foreign markets. Furthermore, the franchisee’s knowledge can be applied or leveraged to develop markets and navigate efficiently. Therefore, the owner is not left to fully control the franchisee’s operations, services, and products.
Disadvantage of the Franchising Entry Method
However, the franchising entry mode results in a challenge when maintaining control over the granted rights. Conflicts are often witnessed between the owners and franchisees, such as legal disputes (Cavusgil et al., 2016). Remarkably, the owner’s image may be challenging to preserve because they do not have complete control of the operations. Furthermore, ongoing support and assistance are required when franchising is an entry strategy. The knowledge given to franchisees may contribute to future competition if it is misused.
References
Cavusgil, S. T., Knight, G., & Riesenberger, J. (2016). International business: The new realities. Pearson.
Gaitán, M. G. (2021). Licensing as a central structure of technology transfer agreements–joint venture and franchising agreements. GRUR International, 70(5), 427-439.
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