In the previous post, I have talked about two methods of entering foreign markets, namely direct market entry and indirect market entry.
In this post, I will share the following more ways to enter a new international market:
Licensing: International licensing agreements allow foreign, monopolistic or non-exclusive companies to manufacture the licensor’s product for a fixed period of time in a particular market.
In this mode of market access mode, a “licensor” provides certain rights, guidance or resources to the “licensee” in the host country. Rights & resources may include patents, trademarks, management skills, technology, and other items that enable a licensee to manufacture and sell in the host country a product similar to the product, which the licensor has produced and sold in the home without requiring the licensor to open a new operation abroad. Licensor earnings typically include one-time payments & engineering fees. Royalties are typically calculated as a percentage of the revenue on a recurring basis.
Since this entry mode, the transfer of knowledge between the parent company (licensor) and the licensee is the central point. The decision to make an international licensing agreement depends on the rules, regulations & respect of IP rights in the host country. Licensing is a relatively flexible work agreement customized to suit both licenser and licensee’s needs and interests. The main advantages and reasons to use an international license for international expansion:
- Additional income for technical know-how and service;
- New market access without exporting from existing establishments;
- Quick expansion without much risk and large capital investment;
- Paves the way for future investments into the market;
- Retains markets that are set to be closed by trade restrictions;
- Political risk is minimized as licensees are usually 100% locally owned; and
- Very attractive for new companies in international business.
On the other hand, international licensing as a foreign market penetration has certain drawbacks and why companies should not use it:
- Lower-income compared to other entry modes;
- Loss of control over licensed manufacturing and marketing practices which results in loss of quality;
- The risk of having the brand name and the reputation ruined by an incompetent partner;
- Foreign partners can, at times, cannibalise the other markets by selling their products in places where the parent company is already located.
Franchising: can be defined as a system in which an independent “franchisee” pays fees and royalties to a parent company (“franchisor”) in exchange for an affirmative right to sell its products or services and often use its business format and system. The franchisor is the person or corporation that owns the trade-marks and business model. The franchisee is the person or Corporation that owns and operates the business using the trade-mark and business model system licensed from the franchisor.
Compared to licensing, franchise agreements tend to be limited, and franchisor offers a package of rights and resources that typically includes equipment, management systems, operating instructions, initial training, website approval and all assistance necessary for the franchisee to run the business in the same way as the franchisor performs it. Additionally, while a licensing agreement involves things like intellectual property, trade secrets, and others while franchising, it is limited to enterprise trademarks and know-how.
Advantages of international franchising:
- Low political risks;
- Low costs;
- Allows simultaneous expansion into different regions of the world;
- Well-selected partners bring financial investment as well as manageability to the operation.
Disadvantages of franchising:
- Low control over franchisee;
- Duplication of the business model, including legal dispute;
- Maintaining the brand image in foreign markets can be challenging;
- Continuous monitoring and evaluation of franchisee performance and ongoing support;
- The franchisee can leverage the acquired knowledge and become a competitor in the future.
The above are more two more methods to enter a new international market. Do you have another opinion? Please comment below to discuss together.