Franchising and Licensing: Features, Commonalities and Differences of two Modes of Internationalization

There are four main modes to approach the internationalization process and to work on international trade and development activities: Import, Export, Licensing and Franchising.

If we focus our attention on the less common modes of internationalization, Franchising and Licensing, we can notice a lot of features which are common to both modes and that can be analyses for a better understanding of the internationalization process.

Normally we refer to Franchising considering all those Brands that expand their presence in a territory through a network of stores. If you have more than one shop... you are a franchise. This statement is wrong because it is not always the case. In fact, some Brands prefer to retain ownership of every single point, regardless of their location, thus centralizing the internationalisation processes and closing the doors to potential affiliates. This is the case, for example, of brands such as Kiko or GameSpot. Even Starbucks has grown internationally by opening its own branches (by contrast, McDonald’s is considered as one of the best examples of a business that has grown through a franchising model).

When a company, on the other hand, decides to expand its business and open its doors to other entrepreneurs decentralizing the management (and capital) of the various points, there are two methods that can be used: Franchising or Licensing.

We have a franchising agreement when a mother company tries to transfer to its affiliates a specific know-how. This know-how is also linked to the concept of licensing, indeed, it can include confidential information, trademarks, logos and designs, copyright materials and potentially patents. The essence of franchising is therefore the passage of a real "know-how" that must be collected in a special operating manual becomes vitally important as well as legally indispensable. In this case the freedom of the franchisee is really minimal to the advantage of standardizing processes and product quality.

The essence of licensing is the owner retaining ownership of its Intellectual Property while offering others the right to use it. Thus, a company is allowing third parties to use a technology or a new process idea to develop their businesses. This license is usually given in return for royalties. There is also a so-called brand-licensing which represents an agreement of a mother company providing to its licensees its brand, directives and a basic set of business together with constraints and indications related to the use of the brand. The emphasis in brand-licensing is shifted to communication and to the brand itself, leaving to licensees more possibilities for movement in the management of the activity. Luxury brands are highly sought after for licenses, as their brand brings a touch of prestige to the product to which they lend their name. But luxury brands should be careful not to stray too far from their market or offer too generous licenses. This due to a risk of devaluating its brand and lost much of its cachet (i.e. Pierre Cardin).