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SAI INTERNATIONAL SCHOOL
CLASS-XI

Sub: Business Studies
Chapter 10: International Trade
Topic: Modes of Entry into International Business II (Licensing, Franchising

and wholly owned Subsidiaries)
(LESSON NOTES– 50)
Licensing and Franchising

Licensing is a contractual arrangement in which one firm grants access to its patents, trade
secrets or technology to another firm in a foreign country for a fee called royalty. The firm that
grants such permission to the other firm is known as licensor and the other firm in the foreign
country that acquires such rights to use technology or patents is called the licensee. It may be
mentioned here that it is not only technology that is licensed. In the fashion industry, a number of
designers license the use of their names. In some cases, there is exchange of technology between
the two firms. Sometimes there is mutual exchange of knowledge, technology and/or patents
between the firms which is known as cross-licensing.

Franchising is a term very similar to licensing. One major distinction between the two is that
while the former is used in connection with production and marketing of goods, the term
franchising applies to service business. The other point of difference between the two is that
franchising is relatively more stringent than licensing. Franchisers usually set strict rules and
regulations as to how the franchisees should operate while running their business. Barring these
two differences, franchising is pretty much the same as licensing. Like in the case of licensing, a
franchising agreement too involves grant of rights by one party to another for use of technology,
trademark and patents in return of the agreed payment for a certain period of time. The parent
company is called the franchiser and the other party to the agreement is called franchisee. The
franchiser can be any service provider be it a restaurant, hotel, travel agency, bank wholesaler or
even a retailer - who has developed a unique technique for creating and marketing of services
under its own name and trade mark. It is the uniqueness of the technique that gives the franchiser
an edge over its competitors in the field, and makes the would-be-service providers interested in
joining the franchising system. McDonald, Pizza Hut and Wal-Mart are examples of some of the
leading franchisers operating worldwide.

Advantages

As compared to joint ventures and wholly owned subsidiaries, licensing/ franchising is relatively
a much easier mode of entering into foreign markets with proven product/technology without