Foreign entry mode refers to the mode of choice selected or institutional arrangement for organizing and conducting business in the foreign market. The mode chosen is very critical as it determines the level of control the firm enjoys in its business operations as well as the extent to which it succeeds in the target market. Many forms of entry are available, and studies distinguish the modes as equity and non-equity modes. Equity methods, such as joint ventures and wholly-owned subsidiaries, involve some degree of ownership while non-equity modes, such as licensing and franchising, do not involve ownership. This paper will delve at discussing the two market selection and foreign entry mode –licensing and franchising. More specifically, the paper discusses these entry modes and their advantages and disadvantages.
Licensing
Licensing is a contractual arrangement whereby a firm or organization planning to extend its operations in the foreign market transfers the right to distribute or manufacture a product or service in a target market. In this mode of entering the foreign market, a company also transfer “the right to use any type of expertise that may include patents, trademarks, company name, technology, and technological know-how, design and/or business methods” (Irwin, 2012). In this foreign entry mode, the licensee is required to pay a fee and/or percentage of sales in exchange for the rights.
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This foreign entry mode is useful in nations with import and investment barriers. It is also important in countries or cases where legal protection is possible and where there is low sales potential in the target country. There are many advantages and disadvantages of using licensing as a foreign entry mode. The advantages and disadvantages of licensing are discussed below.
Advantages of Licensing Arrangement
With a licensing arrangement, it is quick and easy to enter a target market in a foreign country (Langbacka, 2018). Therefore, licensing allows a firm to “jump” border and tariff barrier. Secondly, the licensing arrangement requires low capital investment. The licensee pays a fee in exchange for the rights (Langbacka, 2018). With a licensing arrangement, the potential for large return on investment (ROI) can be realized quickly. Lastly, the other advantage of a licensing arrangement involves low risks. This is because the firm enters with an established product, and it takes fewer financial and legal risks.
Disadvantages of Licensing Arrangement
One of the disadvantages with the licensing arrangement is that the firm issuing license will have a low level of control. In addition, the licensee may become a competitor (Langbacka, 2018). The other disadvantage of the licensing arrangement is that poor quality management can damage the brand reputation of the company issuing the licence in other territories. Lastly, the license period is usually limited.
Franchising
Franchising is an arrangement where a firm (the franchiser) grants another (the franchisee) the rights to use trade-name to produce as well as market product or service. The franchiser may also grant the right to certain business system and processes to the franchisee. Unlike licensing arrangement, where the license period is usually limited, the franchisee usually pays a one-time franchise-fee plus a percentage of sales revenues. In this mode of entry, the franchiser provides a developed way of doing business in return for periodic payments.
Advantages of Franchise Arrangement
One of the advantages of franchise arrangement as a mode of entry is that it offers the independence of small business ownership supported by the benefits of a big business network (Queensland Government, 2019). It is easier to secure finance for a franchise. This is because it costs less to buy a franchise that starts a business of the same type. To add to this, franchises have a higher rate of success than start-up businesses (Queensland Government, 2019). Thus, the risk of business failure is reduced with franchising. This is because the business is based on a proven idea. Lastly, the franchisee has exclusive rights in its territory. This is because the franchiser cannot sell any other franchises in the same territory.
Disadvantages of Franchise Arrangement
One of the disadvantages of a franchise arrangement is that they dictate how the franchisee should run the business (Queensland Government, 2019). The inflexibility nature of a franchise may restrict a franchisee from introducing new changes to the business. This means that there may be little room for creativity and that the franchisee may be restricted to respond to the market. The other disadvantage is that bad performance by other franchisees may affect the reputation of other franchises (Queensland Government, 2019). In this mode of entry, all profits are usually shared with the franchiser. Lastly, the franchisor might go out of business.
Conclusion
When entering a foreign market, investors can choose different foreign entry modes. Some of the modes which have been discussed in this paper are licensing and franchising. The key issues about how much control a firm has over its operation, the degree of risk involved, as well as what share of the sale revenues the firms get vary across all the different foreign modes.
References
Irwin, T. (2012). Licensing arrangements –the pros and cons. [Online]. Retrieved from: https://www.tcii.co.uk/2012/10/26/licensing-arrangements-the-pros-and-cons/ . Accessed 11 th August 2019.
Langbacka, A. (2018). Pros and cons of different market entry modes. [Online]. Retrieved from: https://www.theseus.fi/bitstream/handle/10024/150079/Langbacka_Anna.pdf?sequence=1&isAllowed=y . Accessed 11 th August 2019.
Queensland Government. (2019). Advantages and disadvantages of buying a franchise. [Online]. Retrieved from: https://www.business.qld.gov.au/starting-business/buying-business/buying-franchise/advantages-disadvantages . Accessed 11 th August 2019.
