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The Advantages and Disadvantages of International Licensing and Franchising

INTRODUCTION

International business was defined as ‘any business activity organised and carried out across national borders by business firms in pursuit of their stated aims and objectives’ by Harrison, et al.[1] The way to conduct a business in a foreign market is possible with contractual methods that become international.[2] These contractual methods can be seen in many forms such as international licensing and franchising. When the parties make licensing or franchising agreement, the parties should critically consider their advantages and disadvantages, because the agreement can bring a great success or failure. This paper discusses international licensing and franchising with critically evaluating their advantages and disadvantages.

LICENSING

Entering a foreign market including the licensor and the licensee is called licensing. In international licensing agreement, the licensee will have a right to use licensor’s intellectual property for a particular time in agreed territory, which is outside the licensor’s country, in return for an agreed fee or royalty.[3] In other words, the sale of intellectual property is not a subject of a licensing agreement.[4] Patent, designs, trademark and copyright might a subject of the licensing agreement as industrial property, in some cases, trade secrets can be included.[5] In certain agreements, companies might also provide physical components with intellectual property rights for manufacturing in a foreign country.[6] In addition to this, joint venture or investment agreement might include the licensing terms, because technical assistance and knowhow will be required when the operations proceed.[7]

On the other hand, international licensing has several advantages and disadvantages as a form of foreign operation method. The major advantages of international licensing for the licenser are listed below as follows:

(i) The licensee assumes the low cost of licensing and associated risks,

(ii) If the licenser has not got knowledge about the new market or entering new markets carry certain risks, the licensing agreement might overcome these difficulties,

(iii) In certain cases, protectionist barriers such as tariffs, quotas or cultural barriers might be a problem for entering a foreign market; however, licensing agreement is a proper way to overcome these obstacles,

(iv) A good way to activate a firm’s inactive intellectual property.[8]

Otherwise, international licensing has sundry disadvantages as follows:

(i) The licensor’s own investment can sometimes be more profitable than operating through a license agreement,

(ii) A licensee can be named as the licensor’s rival,

(iii) The licensee may demand contributions such as technical assistance, instruction of personnel etc. and it can be extra inconvenience for the licensor,

(iv) The licensee should evaluate the licensing agreement when the trademark is not a subject of it.[9]

The case of Fen Hin Chon Enterprises, Ltd. v Porelon, Inc.[10], shows certain disadvantages of international licensing. Fen Hin Chon (FCH), which is Chinese company, had an exclusive license, which includes the royalty of 5 percent of net sales which is a disadvantage, to manufacture and sell pre-linked hand stand in Hong Kong and Macao, using Porelon’s, which is American manufacturer, manufacturing know-how, Porelon premix, which is ink-impreg-nated plastic resins, and the Porelon and Perma-Stamp trademark.

After the assignment of Wil Ooms who is marketing agent for Porelon, Mark Universal (MU) becomes a competitor which is a disadvantage and the supplier of premix to FCH because of his actions. After that, MU got exclusive rights to import and develop the prelinked hand-stamp technology into China, Porelon decided to terminate the exclusive license with FCH, because of the sales, quality and improper use of the name Johnson Wax. After receiving a letter about termination from Porelon, FCH sued for damages resulting from the interruptions of its business and for lost profits from the wrongful termination of the license. It seems that, because of the limited royalty, Porelon tried to find another way to make more profit. However, in general Porelon has entered in a Chinese market with international licensing which is an advantage for Porelon.

FRANCHISING

Franchising was defined by the European Union as ‘a gathering of industrial or intellectual property rights relative to trademark, commercial denominations, insignia, utility models, designs, copyrights, know-how, or patents to be utilised for the resale of goods or services to a final user.’[11] Franchising began to be substantially used in at the beginning of the 20th century by three industries which are motor vehicle dealerships, the retailing side of the oil business and soft drink bottling.[12] The companies such as McDonald’s, KFC and Body Shop used international franchising as the main part of their enlargement business strategies and it brought global success to these companies.[13] After the use of international franchising, it has also become a legal problem under intellectual property, antitrust, tax and other related laws.[14] Generally, a franchising agreement includes a license of trademark right, know-how, copyright and some instructions about store such as decor, floor plan designs.[15] Even, the agreement might contain necessary training for the employees.[16]

Like international licensing, international franchising has certain advantages and disadvantages. The principal advantages of international franchising are:

(i) Franchising is a beneficial way to make a profit, generate an income and extend the reputation by granting distributorships all around the world,

(ii) The franchisor entitled to check quality of services in store or shop according to franchising agreement,

(iii) Possible loss of profits will be shared between the franchisor and franchisee,

(iv) Franchising agreement gives a chance to obtain information about foreign markets to the franchisor,

(v) Well knows products or services concepts will be subject of the franchising agreement.[17]

Beyond these advantages, the disadvantages of international franchising as follows:

(i) Specified products can be subject of the franchising agreement and it will be a limit for franchisee,

(ii) It can be risky for franchisee to enter into a franchising agreement that releases product or service which have not been proven,

(iii) The franchising agreement may not have been recognised by certain countries and it can be a problem for protection and enforcement of the franchising agreement.[18]

The case of Raymond Dayan v. McDonald’s Corporation[19] is important to understand a loss of control of over franchise. In this case, the franchisee obtained an exclusive franchise to conduct McDonald’s restaurants in Paris, France. According to an agreement, McDonald’s will demand standards about quality, cleanliness and service. After nearly ten years, McDonald’s terminated the franchise agreement because of quality and cleanliness infringements such as not using approved products, not using pickles, charging extra for ketchup or mustard, hiding straws and napkins under the counter and refusing to take a refresher course at McDonald’s Hamburger University, not cleaning the store and leaving dirty, not wearing uniform by store crews. Another case of Krehl v. Baskin-Robbins Ice Cream Co.[20] is an important example for franchising agreement. As mention above, proven products are being sold with franchising and in this case, according to the franchising agreement, the franchisee has to buy Baskin-Robbins ice cream from the franchiser. It can be a disadvantage or advantage for franchisee, because the product has a worldwide reputation which is an advantage and it also can be a limit which is a disadvantage for franchisee.

CONCLUSION

These forms can bring a success to the companies but disadvantages of international licensing and franchising are undeniable. The best example of the success of international licensing is Disney Consumer Products and Disney is the first in The Top 150 Global Licensors, its global retail sales of licensed product reached $45.2 billion so far.[21] The example of the success of international franchising is 7-Eleven Inc. which is the top franchiser in 2015 with 55.944 franchising in all the world.[22] Companies which seeks to be successful like Disney or 7-Eleven Inc. try to minimise these disadvantages with certain methods such as companies mostly develop their franchising system in a domestic market and after they use international franchising for entering into a foreign market.[23] After overcoming of these disadvantages, companies focus on the advantages. However, it should not be forgotten that licensing and franchising are long term business relationships which demand good faith dealings and mutual respect.[24]

BIBLIOGRAPHY

Primary Sources

European Union Law

Commission Regulation (EEC) No 4087/88 of 30 November 1988 on the application of Article 85 (3) of the Treaty to categories of franchise agreements

Cases

Fen Hin Chon Enterprises, Ltd. v Porelon, Inc. 667 F. Supp. 1174 (M.D. Tenn. 1987)

Krehl v. Baskin-Robbins Ice Cream Co. 644 F.2d 1348 (9th Cir. 1982)

Raymond Dayan v. McDonald’s Corporation 466 N.E.2d 958 (I11. App. 1984)

Secondary Sources

Textbooks

Folsom, R H Gordon, M W & Spanogle, J A International Trade and Investment in a Nutshell (6th ed. West Cost Publishing 2000)

Harrison, A Dalkiran, E and Elsey, E International Business: Global Competition from a European Perspective (2000 OUP)

Hotchkiss, C International Law for Business (McGraw-Hill 1994)

Schaffer, R Agusti, F Dhooge, L & Earle, B International Business Law and Its Environment (7th ed. South-Western 2009)

Verma, H V Services Marketing: Text and Cases (2nd ed. Pearson 2012)

Welch, L S Benito, G R Petersen, B Foreign Operation Methods: Theory, Analysis, Strategy (Edward Elgar Publishing 2007)

Journal Articles

Schneider, M ‘The Franchising Contract’ (1985) ULR 154

Ladas, S P ‘Problems of Licensing Abroad’ (1965) 1965 (3) UILF 411

von Seidel, M ‘Franchising’ (1995) 4 (2) JBL 70

Documentary Material

Document of WIPO, Licensing of Intellectual Property Assets; Advantages and Disadvantages, available at (last accessed 10.01.2016)

Websites

‘Franchise 500’, available at (last accessed 10.01.2016)

‘The Top 150 Global Licensors’, available at < http://www.licensemag.com/license-global/top-150-global-licensors-1?page=0,1> (last accessed 09.01.2016)

Footnotes

[1] Harrison, A Dalkiran, E and Elsey, E International Business: Global Competition from a European Perspective (2000 OUP), at page 5.

[2] Welch, L S Benito, G R Petersen, B Foreign Operation Methods: Theory, Analysis, Strategy (Edward Elgar Publishing 2007), at page 3.

[3] Harrison, op.cit., at page 15.

[4] Welch, op.cit., at page 97.

[5] Ladas, S P ‘Problems of Licensing Abroad’ (1965) 1965 (3) UILF 411, at page 484.

[6] Schaffer, R Agusti, F Dhooge, L & Earle, B International Business Law and Its Environment (7th ed. South-Western 2009), at page 558.

[7] Folsom, R H Gordon, M W and Spanogle, J A International Trade and Investment in a Nutshell (6th ed. West Cost Publishing 2000), at page 267.

[8] Harrison, op.cit., at page 15.

[9] Official document of WIPO, Licensing of Intellectual Property Assets; Advantages and Disadvantages, available at (last accessed on 10.01.2016).

[10] 667 F. Supp. 1174 (M.D. Tenn. 1987).

[11] Commission Regulation (EEC) No 4087/88 of 30 November 1988 on the application of Article 85 (3) of the Treaty to categories of franchise agreements.

[12] Welch, op.cit., at page 51.

[13] Ibid.

[14] Folsom, op.cit., at page 260.

[15] Schneider, M ‘The Franchising Contract’ (1985) ULR 154, at page 165.

[16] von Seidel, M ‘Franchising’ (1995) 4 (2) JBL 70, at page 71.

[17] Verma, H V Services Marketing: Text and Cases (2nd ed. Pearson 2012), at page 122.

[18] Harrison, op.cit., at page 18.

[19] 466 N.E.2d 958 (I11. App. 1984).

[20] 644 F.2d 1348 (9th Cir. 1982).

[21] ‘The Top 150 Global Licensors’, available at (last accessed 09.01.2016).

[22] ‘Franchise 500’, available at (last accessed 10.01.2016).

[23] Welch, op.cit., at page 60.

[24] Hotchkiss, C International Law for Business (McGraw-Hill 1994), at page 264.

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