Contractual agreements are long term non equity associations between a company and another in a foreign market. Contractual agreements generally involve the transfer of technology, processes, trademarks or human skills. In short, they serve as a means of transfer of knowledge rather than equity.
Although licensing may be the least profitable way of entering a market, the risks and headaches are less than for direct investments. It is a legitimate means of capitalizing on intellectual property in a foreign market, and such agreements can also benefit the economies of target countries. Licensing takes several forms. Licenses may be granted for production processes, for use of a trade name, or for the distribution of imported products. Licenses may be closely controlled or be autonomous and they permit expansion without great capital or personnel commitment if licensees have the requisite capabilities. Not all experiences with licensing are successful because of the burden of finding, supervising and inspiring licensees.
Franchising is a rapidly growing form of licensing in which the franchiser provides a standard package of products, systems and management services and the franchisee provides market knowledge capital, and personal involvement in management . The combination of skills permits flexibility in dealing with local market conditions and yet provides the parent firm with a reasonable degree of control. The franchiser can follows through on marketing of the products to the point of final sale. It is an important form of vertical market integration. Potentially the franchise system provides an effective blending of skill centralization and operational decentralization; it has become an increasingly important form of international marketing. In England, for example annual franchised sales of fast food are estimated at nearly $2 billion which accounts for 30 per cent of all foods eaten outside the home.
Prior to 1970, international franchising was not a major activity. A survey by the International Franchising Association revealed that only 14 percent of its member firms had franchises outside of the United States and the majority of those were in Canada. Now more than 30,000 franchises of US firms are located in countries throughout the world. Franchises include soft drinks motels (including membership organizations like Best Western International) retailing , fast food , care rentals , automotive services recreational services n a variety of business services from print shops to sign shops. Canada is the dominant market for US franchisers with Japan and the United Kingdom second and third in importance. The Asia Pacific Rim has seen rapid growth as companies look to Asia for future expansion.
Despite temporary setbacks during the global economic downturn right after the turn of the millennium, franchising is still expected to be the fastest growing market entry strategy. Franchises were often among the first types of foreign retail business to open in the emerging market economies of Eastern Europe the former republics of Russia and China. McDonald’s is in Moscow (its first store seated 700 inside and had 27 cash registers), and Kentucky Fried Chicken is in China (the Beijing KFC store has the highest sales volume of any KFC store in the world). The same factors that spurred the growth of franchising in the US domestic economy have led to its growth in foreign markets. Franchising is an attractive form of corporate organization for companies wishing to expand quickly with low capital investment. The franchising system combines the knowledge of the franchiser with the local knowledge and entrepreneurial spirit of the franchisee. Foreign laws and regulations are friendly toward franchising because it tends to foster local ownership, operations and employment.
Two types of franchise agreements are used by franchising firms – master franchise and licensing – either of which can have a country’s government as one partner. The master franchise is the most inclusive agreement and the method used in more than half of the international franchises. The master franchise gives the franchisee the rights to a specific area (many are for an entire country) with the authority to sell or establish sub-franchises. The McDonald’s franchise in Moscow is a master agreement owned by a Canadian firm and its partner, the Moscow City Council Department of Food Services.
Licensing a local franchisee the right to use a product, good service trademark, patent, or other asset for a fee is a second type of franchise arrangement. Coca-cola Company licenses local bottlers in an area or region to manufacture and market Coca-cola using syrup sold by Coca- cola. Rental car companies often enter a foreign market by licensing a local franchisee to operate a rental system under the trademark of the parent company.