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Licensing and Franchising

Licensing and franchising are two methods for international business expansion, differing in structure and control. Licensing allows a licensee to use a licensor's brand or technology for a fee, while franchising requires a franchisee to operate under strict guidelines of the franchisor. The choice between these strategies depends on a company's goals and desired level of involvement in foreign markets.

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Shaheryar Rashid
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12 views2 pages

Licensing and Franchising

Licensing and franchising are two methods for international business expansion, differing in structure and control. Licensing allows a licensee to use a licensor's brand or technology for a fee, while franchising requires a franchisee to operate under strict guidelines of the franchisor. The choice between these strategies depends on a company's goals and desired level of involvement in foreign markets.

Uploaded by

Shaheryar Rashid
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Licensing vs.

Franchising in International
Business
Introduction

In international business and trade, companies often seek ways to expand their presence in
foreign markets. Two popular methods for global expansion are licensing and franchising.
While both involve granting rights to a third party, they differ in structure, control, and
operations. This assignment will explain the key differences between licensing and
franchising in simple terms, with examples to clarify their applications.

What is Licensing?

Licensing is a business arrangement where a company (the licensor) gives permission to


another company (the licensee) to use its brand name, patents, trademarks, technology, or
product in exchange for a fee or royalty. The licensee operates independently but follows
some rules set by the licensor.

Example of Licensing

A well-known example of licensing is Disney. Disney owns famous characters like Mickey
Mouse and Spider-Man. Instead of producing all merchandise itself, Disney licenses its
characters to manufacturers around the world. For example, a toy company in China can get a
license to produce Spider-Man action figures. The company sells the toys under its own name
but pays a fee to Disney for using the character.

Advantages of Licensing

1. Less investment – The licensor does not have to invest in production or operations in
a foreign market.
2. Faster expansion – The company can enter new markets quickly without setting up
its own facilities.
3. Revenue generation – The licensor earns money through royalties without directly
managing the business.

Disadvantages of Licensing

1. Limited control – The licensor has little control over how the licensee operates.
2. Risk to brand reputation – If the licensee produces low-quality products, it can
damage the licensor’s brand.
What is Franchising?

Franchising is a business model where a company (the franchisor) allows another person or
company (the franchisee) to operate a business using its brand name, business model,
products, and services. The franchisee must follow strict guidelines and receive training and
support from the franchisor.

Example of Franchising

A classic example of franchising is McDonald’s. McDonald’s operates in many countries


through franchises. If someone wants to open a McDonald’s restaurant in India, they must
buy a franchise. The new McDonald’s location must use the same recipes, logos, uniforms,
and store design as all other McDonald’s outlets. The franchisee benefits from the company’s
strong brand, while McDonald’s expands its global presence.

Advantages of Franchising

1. Brand recognition – The franchisee benefits from an already established and trusted
brand.
2. Ongoing support – The franchisor provides training, marketing, and business
strategies.
3. Lower risk – The franchisee operates under a proven business model, reducing the
risk of failure.

Disadvantages of Franchising

1. Strict control – The franchisee must follow all the franchisor’s rules and cannot
change the business model.
2. High initial costs – Buying a franchise often requires a large upfront investment.
3. Royalty payments – The franchisee must pay regular fees or a percentage of profits
to the franchisor.

Conclusion

Licensing and franchising are both effective methods for international business expansion.
Licensing is best for companies that want to expand their brand with minimal involvement,
while franchising is ideal for businesses that require strict control over operations. Choosing
between these two strategies depends on the company’s goals, resources, and level of
involvement desired in foreign markets.

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