Explain the advantages and limitations of licensing and franchising.

1. Under the licensing/franchising system, it is the licensor/franschiser which sets up the business unit and invests its own money in the business. As such, the licensor/franchiser has to virtually make no investments abroad. Licensing/ franchising is, therefore, considered a less costly mode of entering into international business.

2. Since no or very little foreign investment is involved, licensor/franchiser is not a party to the losses, if any, that occur to foreign business. Licensor/franchiser is paid by the licensee/ franchisee by way of fees fixed in advance as a percentage of production or sales turnover. This royalty or fee keeps accruing to the licensor/ franchiser so long as the production and sales keep on taking place in the licensee’s/franchisee’s business unit.

3. Since the business in the foreign country is managed by the licensee/franchisee who is a local person, there are lower risks of business takeovers or government interventions.

4. Licensee/franchisee being the local person has greater market knowledge and contacts which can prove quite helpful to the licensor/franchiser in successfully conducting its marketing operations.

5. As per the terms of the licensing/ franchising agreement, only the parties to the licensing/franchising agreement legally entitled to make use of the licensor’s/franchiser’s copyrights, patents and brand names in the foreign countries. As a result, other firms in the foreign market cannot make use of such trademarks and patents.

Limitations :

1. When licensee/franchisee becomes skilled in the manufacture and marketing of the licensed/franchised products, there is a danger that the licensee can start marketing an identical product under a slightly different brand name. This can cause severe competition to the licensor/ franchiser.

2. If not maintained properly, trade secrets can get divulged to others in the foreign markets. Such lapses on the part of the licensee/franchiser can cause severe losses to the licensor/franchiser.

3. Over time, conflicts often develop between the licensor/franchiser and licensee/franchisee over issues such as maintenance of accounts, payment of royalty and non-adherence to norms relating to production of quality products. These differences often result in costly litigations, causing harm to both the parties.