Developing International Strategies by Rudolf Grünig & Dirk Morschett

Author:Rudolf Grünig & Dirk Morschett
Language: eng
Format: epub
Publisher: Springer Berlin Heidelberg, Berlin, Heidelberg

10.2.4 Production in the Target Market Without FDI

As shown in Fig. 10.1, the company may allow a partner to produce in the target market on its own account. If this concerns products, a license agreement is concluded. In the case of services, a franchise agreement is signed.

Licensing is a strategy with which a company can set up production in a foreign country without major capital investment. It leads to production by a licensee without any requirement for the licensor to create a new operation abroad (see Hollensen 2011, pp. 358ff.; Morschett et al. 2015, pp. 392f.). In licensing agreements the licensor grants the rights to intellectual property to the licensee for a defined period. The licensee normally gets the right to use the production technology, to manufacture certain products and to distribute them in a specific territory. In return, the licensee pays royalty fees (see e.g. Hill 2008, pp. 407f.). An example of production in the target market via licensing is presented in Inset 10.2.

Licensing is an option for companies that have an attractive process or product technology but may lack the financial resources or managerial capacity to exploit this in a foreign country. With licensing, this task is mainly shifted to the licensee, usually a local company in the specific foreign market. Licensing brings a number of benefits (see Bradley 2005, p. 244). It gives a company access to a foreign market with low capital investment and, thus, low capital risk. It can give access even to a difficult market because the market access is granted by the local partner. The local partner is interested in selling the product and usually also provides the necessary services. Due to the local presence, customer service by the licensee may improve service levels and delivery speed in the foreign country. Moreover, production costs in most host countries are lower than in Western European countries like Switzerland or Germany. This supports the negotiation process with potential licensees since it usually helps to raise margins. But licensing has also important disadvantages: The licensor needs to disclose its technology to a foreign partner. The risk of creating a future competitor is significant. Furthermore, the company has only a passive interaction with the market, since sales are realized by the licensee.

Franchising has its main relevance in retailing and other parts of the service industry. It is usually used in outlet-based business models, such as retail stores, car rentals, cosmetics studios, hotels and restaurants. Franchising is defined as a contractual agreement between two legally and financially separate companies, the franchisor and the franchisee (see Morschett et al. 2015, pp. 393ff.). The franchisor, who has established a market-tested business concept, enters into a relationship with a number of franchisees, typically small business owners, who are allowed to use the franchisor’s brand and must operate their business according to the franchisor’s specified format and processes. The franchisor provides ongoing commercial and technical assistance. In return, the franchisees typically pay an initial fee as well as royalties, which average about 5 % of gross sales, plus some advertising fees (see Inma 2005, p.

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