Multinational Firms

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With the advent of improved communication and technology, corporations have been able to expand into multiple countries.

KEY Points

• Multinational corporations operate in multiple countries.
• MNCs have considerable bargaining power and may negotiate business or trade policies with success.
• A corporation may choose to locate in a special economic zone, a geographical region that has economic and other laws that are more free-market-oriented than a country’s typical or national laws.

Term

• Multinational corporation: A corporation or enterprise that operates in multiple countries.

Example

• McDonalds operates in over 119 different countries, making it a fairly large MNC by any standard

A multinational corporation (MNC) or multinational enterprise (MNE) is a corporation registered in more than one country or has operations in more than one country. It is a large corporation which both produces and sells goods or services in various countries . It can also be referred to as an international corporation. The first multinational corporation was the Dutch East India Company, founded March 20, 1602.

Ford Motor Corp.
Ford is a MNC with operations throughout the world.

Corporations may make a foreign direct investment. Foreign direct investment is direct investment into one country by a company located in another country. Investors buy a company in the country or expand operations of an existing business in the country.

A corporation may choose to locate in a special economic zone, a geographical region with economic and other laws that are more free-market-oriented than a country’s typical or national laws.

Multinational corporations are important factors in the processes of globalization. National and local governments often compete against one another to attract MNC facilities, with the expectation of increased tax revenue, employment and economic activity. To compete, political powers push toward greater autonomy for corporations. MNCs play an important role in developing economies of developing countries.

Many economists argue that in countries with comparatively low labor costs and weak environmental and social protection, multinationals actually bring about a “race to the top.” While multinationals will see a low tax burden or low labor costs as an element of comparative advantage, MNC profits are tied to operational efficiency, which includes a high degree of standardization. Thus, MNCs are likely to adapt production processes in many of their operations to conform to the standards of the most rigorous jurisdiction in which they operate.

As for labor costs, while MNCs pay workers in developing countries far below levels in countries where labor productivity is high (and accordingly, will adopt more labor-intensive production processes), they also tend to pay a premium over local labor rates of 10% to 100%.

Finally, depending on the nature of the MNC, investment in any country reflects a desire for a medium- to long-term return, as establishing a plant, training workers and so on can be costly. Therefore, once established in a jurisdiction, MNCs are potentially vulnerable to arbitrary government intervention like expropriation, sudden contract renegotiation and the arbitrary withdrawal or compulsory purchase of licenses. Thus both the negotiating power of MNCs and the “race to the bottom” critique may be overstated while understating the benefits (besides tax revenue) of MNCs becoming established in a jurisdiction.

GLOSSARY

Autonomy

The capacity to make an informed, uncoerced decision. Self-government; freedom to act or function independently.

Benefit

An advantage, help or aid from something Employee benefits and (especially in British English) benefits in kind (also called fringe benefits, perquisites, perqs or perks) are various non-wage compensations provided to employees in addition to their normal wages or salaries. An advantage, help, or aid from something.

Communication

The concept or state of exchanging information between entities. an instance of information transfer; a conversation or discourse the concept or state of exchanging data or information between entities.

Comparative advantage

The ability of a party to produce a particular good or service at a lower marginal and opportunity cost over another. The concept that a certain good can be produced more efficiently than others due to a number of factors, including productive skills, climate, natural resource availability, and so forth. The ability of a party to produce a particular good or service at a lower margin and opportunity cost over another.

Corporation

A group of individuals, created by law or under authority of law, having a continuous existence independent of the existences of its members, and powers and liabilities distinct from those of its members. a group of individuals, created by law or under authority of law, having a continuous existence independent of the existences of its members, and powers and liabilities distinct from those of its members.

Developing

Of a country: becoming economically more mature or advanced; becoming industrialized.

Economy

Collective focus of the study of money, currency and trade, and the efficient use of resources. The system of production and distribution and consumption. The overall measure of a currency system; as the national economy. The system of production and distribution and consumption. The overall measure of a currency system.

Efficiency

The extent to which a resource, such as electricity, is used for the intended purpose; the ratio of useful work to energy expended. The extent to which time is well used for the intended task. Improved efficiency was a principle goal of progressives, one they thought attainable by the application of scientific and rational thought to social problems.

Employment

The work or occupation for which one is used, and often paid.

Enterprise

A company, business, organization, or other purposeful endeavor.

Facility

The physical means or contrivances to make something (especially a service) possible; the required equipment, infrastructure, location etc.

Foreign direct investment

Investment into production or business in a country by an individual or company of another country. Foreign direct investment is investment directly into production in a country by a company located in another country, either by buying a company in the target country or by expanding operations of an existing business in that country.

Globalization

A common term for processes of international integration arising from increasing human connectivity and interchange of worldviews, products, ideas, and other cultural phenomena. In particular, advances in transportation and telecommunications infrastructure, including the rise of the Internet, represent major driving factors in globalization and precipitate the further interdependence of economic and cultural activities.

Good

An object produced for market.

Investment

A placement of capital in expectation of deriving income or profit from its use. The expenditure of capital in expectation of deriving income or profit from its use.

Jurisdiction

The limits or territory within which authority may be exercised the limits or territory within which authority may be exercised. the power, right, or authority to interpret and apply the law.

License

The legal terms under which a person is allowed to use a product.

Operation

The method or practice by which actions are done. A procedure for generating a value from one or more other values.

Premium

A bonus paid in addition to normal payments. the price above par value at which a security is sold Something offered at a reduced price as an inducement to buy something else. something offered at a reduced price as an incentive to buy something else. The premium is the amount a policy-holder or his sponsor must pay to a health plan to purchase health coverage.

Process

A series of events to produce a result, especially as contrasted to product. in reference to capabilities, a process is how the capability is executed. An outgrowth of tissue or cell.

Productivity

Productivity is a measure of the efficiency of production and is defined as total output per one unit of a total input. The rate at which goods or services are produced by a standard population of workers. A ratio of production output to what is required to produce it (inputs). The state of being productive, fertile, or efficient; the rate at which goods or services are produced by a standard population of workers. the rate at which goods or services are produced by a standard population of workers. The rate at which products and services are produced relative to a particular workforce.

Profits

Collective form of profit.

Revenue

Income that a company receives from its normal business activities, usually from the sale of goods and services to customers. The total income received from a given source.

Revenues

In business, revenue or turnover is income that a company receives from its normal business activities, usually from the sale of goods and services to customers.

Services

That which is produced, then traded, bought or sold, then finally consumed and consists of an action or work.

Standard

Something used as a measure for comparative evaluations. A level of quality or attainment. Standardization the process of setting certain norms or standards for a product with regard to shape, size, color, quantity, quality, weight etc.

Standardization

The process of setting certain norms or standards for a product with regard to shape, size, color, quantity, quality, weight etc.

Joint Ventures

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In a joint venture business model, two or more parties agree to invest time, equity, and effort for the development of a new shared project.

KEY TAKEAWAYs

• Joint business ventures involve two parties contributing their own equity and resources to develop a new project. The enterprise, revenues, expenses and assets are shared by the involved parties.
• Since money is involved in a joint venture, it is necessary to have a strategic plan in place.
• As the cost of starting new projects is generally high, a joint venture allows both parties to share the burden of the project as well as the resulting profits.

Term

• Joint venture: A cooperative partnership between two individuals or businesses in which profits and risks are shared.

Example

• Sony Ericsson is a joint venture between Swedish telecom corporation Ericsson and Japanese electronics manufacturer Sony to develop cellular devices.

Joint Ventures

A joint venture is a business agreement in which parties agree to develop a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets.

Joint Venture

Sony Ericsson is a joint venture between Swedish telecom corporation Ericsson and Japanese electronics manufacturer Sony to develop cellular devices.
When two or more persons come together to form a partnership for the purpose of carrying out a project, this is called a joint venture. In this scenario, both parties are equally invested in the project in terms of money, time and effort to build on the original concept. While joint ventures are generally small projects, major corporations use this method to diversify. A joint venture can ensure the success of smaller projects for those that are just starting in the business world or for established corporations. Since the cost of starting new projects is generally high, a joint venture allows both parties to share the burden of the project as well as the resulting profits. Since money is involved in a joint venture, it is necessary to have a strategic plan in place. In short, both parties must be committed to focusing on the future of the partnership rather than just the immediate returns. Ultimately, short term and long-term successes are both important. To achieve this success, honesty, integrity and communication within the joint venture are necessary.

A consortium JV (also known as a cooperative agreement) is formed when one party seeks technological expertise, franchise and brand-use agreements, management contracts, and rental agreements for one-time contracts. The JV is dissolved when that goal is reached. Some major joint ventures include Dow Corning, MillerCoors, Sony Ericsson, Penske Truck Leasing, Norampac, and Owens-Corning.

GLOSSARY

Assets

Economic resources that represent value of ownership that can be converted into cash (although cash itself is also considered an asset). Any property or object of value that one possesses, usually considered as applicable to the payment of one’s debts. A resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide future benefit.

Asset

Something or someone of any value; any portion of one’s property or effects so considered. Something or someone of any value; any portion of one’s property or effects so considered. Any component, model, process, or framework of value that can be leveraged or reused. Items of ownership convertible into cash; total resources of a person or business, as cash, notes and accounts receivable; securities and accounts receivable, securities, inventories, goodwill, fixtures, machinery, or real estate (as opposed to liabilities).

Business model

The particular way in which a business organization ensures that it generates income, one that includes the choice of offerings, strategies, infrastructure, organizational structures, trading practices, and operational processes and policies.

Communication

The concept or state of exchanging information between entities. An instance of information transfer; a conversation or discourse the concept or state of exchanging data or information between entities.

Cooperative

A type of company that is owned partially or wholly by its employees, customers, or tenants. Abbreviation: co-op.

Corporation

A group of individuals, created by law or under authority of law, having a continuous existence independent of the existences of its members, and powers and liabilities distinct from those of its members. a group of individuals, created by law or under authority of law, having a continuous existence independent of the existences of its members, and powers and liabilities distinct from those of its members.

Enterprise

A company, business, organization, or other purposeful endeavor.

Equity

A legal tradition that deals with remedies other than monetary relief, such as injunctions, divorces and similar actions. Justice, impartiality or fairness. Internal and external equity relate to a comparative level of pay compared to both internal and external candidates. Ownership interest in a company as determined by subtracting liabilities from assets. Ownership interest in a company, as determined by subtracting liabilities from assets. Ownership interest in a company, as determined by subtracting liabilities from assets. Justice, impartiality or fairness. The residual claim or interest to investors in assets after all liabilities are paid. If liability exceeds assets, negative equity exists and can be purchased through stock. Ownership, especially in terms of net monetary value, of a business. Ownership, especially in terms of net monetary value of some business.

Expense

A spending or consuming. Often specifically an act of disbursing or spending funds. In accounting, an expense is money spent or costs incurred in a businesses efforts to generate revenue.

Franchise

The authorization granted by a company to sell or distribute its goods or services in a certain area.

Goal

A result that one is attempting to achieve A desired result that one works to achieve. A result that one is attempting to achieve.

Management

The act of getting people together to accomplish desired goals and objectives using available resources efficiently and effectively. administration; the process or practice of managing administration; the process or practice of managing. Administration; the process or practice of managing.

Money

A generally accepted means of exchange and measure of value. A generally accepted means of exchange and measure of value.

Partnership

An association of two or more people to conduct a business. A business owned by two or more people. A partnership is a form of business in which two or more people operate for the common goal of making profit. Each partner has total and unlimited personal liability of the debts incurred by the partnership.

Profits

Collective form of profit.

Resource

Something that one uses to achieve an objective. An examples of a resource could be a raw material or an employee. Something that one uses to achieve an objective, e.g. raw materials or personnel.

Revenue

Income that a company receives from its normal business activities, usually from the sale of goods and services to customers. The total income received from a given source. In business, revenue or turnover is income that a company receives from its normal business activities, usually from the sale of goods and services to customers.

Contract Manufacturing

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In contract manufacturing, a hiring firm agrees with the contract manufacturer to produce and ship the hiring firm’s goods.

KEY Points

• A hiring firm may enter a contract with a contract manufacturer (CM) to produce components or final products on behalf of the hiring firm for some agreed-upon price.
• There are many benefits to contract manufacturing, and companies are finding many reasons why they should be outsourcing their production to other companies.
• Production outside of the company does come with many risks attached. Companies must first identify their core competencies before deciding about contract manufacture.

Terms

Contract manufacturing: Business model in which a firm hires a contract manufacturer to produce components or final products based on the hiring firm’s design. A business model where a firm hires another firm to produce components or products.

A contract manufacturer (“CM”) is a manufacturer that enters into a contract with a firm to produce components or products for that firm . It is a form of outsourcing. In a contract manufacturing business model, the hiring firm approaches the contract manufacturer with a design or formula. The contract manufacturer will quote the parts based on processes, labor, tooling, and material costs. Typically a hiring firm will request quotes from multiple CMs. After the bidding process is complete, the hiring firm will select a source, and then, for the agreed-upon price, the CM acts as the hiring firm’s factory, producing and shipping units of the design on behalf of the hiring firm.

Benefits

Contract manufacturing offers a number of benefits:

• Cost Savings: Companies save on their capital costs because they do not have to pay for a facility and the equipment needed for production. They can also save on labor costs such as wages, training, and benefits. Some companies may look to contract manufacture in low-cost countries, such as China, to benefit from the low cost of labor.
• Mutual Benefit to Contract Site: A contract between the manufacturer and the company it is producing for may last several years. The manufacturer will know that it will have a steady flow of business at least until that contract expires.
• Advanced Skills: Companies can take advantage of skills that they may not possess, but the contract manufacturer does. The contract manufacturer is likely to have relationships formed with raw material suppliers or methods of efficiency within their production.
• Quality: Contract Manufacturers are likely to have their own methods of quality control in place that help them to detect counterfeit or damaged materials early.
• Focus: Companies can focus on their core competencies better if they can hand off base production to an outside company.
• Economies of Scale: Contract Manufacturers have multiple customers that they produce for. Because they are servicing multiple customers, they can offer reduced costs in acquiring raw materials by benefiting from economies of scale. The more units there are in one shipment, the less expensive the price per unit will be.

RisksBalanced against the above benefits of contract manufacturing are a number of risks:

• Lack of Control: When a company signs the contract allowing another company to produce their product, they lose a significant amount of control over that product. They can only suggest strategies to the contract manufacturer; they cannot force them to implement those strategies.
• Relationships: It is imperative that the company forms a good relationship with its contract manufacturer. The company must keep in mind that the manufacturer has other customers. They cannot force them to produce their product before a competitor’s. Most companies mitigate this risk by working cohesively with the manufacturer and awarding good performance with additional business.
• Quality: When entering into a contract, companies must make sure that the manufacturer’s standards are congruent with their own. They should evaluate the methods in which they test products to make sure they are of good quality. The company has to ensure the contract manufacturer has suppliers that also meet these standards.
• Intellectual Property Loss: When entering into a contract, a company is divulging their formulas or technologies. This is why it is important that a company not give out any of its core competencies to contract manufacturers. It is very easy for an employee to download such information from a computer and steal it. The recent increase in intellectual property loss has corporate and government officials struggling to improve security. Usually, it comes down to the integrity of the employees.
• Outsourcing Risks: Although outsourcing to low-cost countries has become very popular, it does bring along risks such as language barriers, cultural differences, and long lead times. This could make the management of contract manufacturers more difficult, expensive, and time-consuming.
• Capacity Constraints: If a company does not make up a large portion of the contract manufacturer’s business, they may find that they are de-prioritized over other companies during high production periods. Thus, they may not obtain the product they need when they need it.
• Loss of Flexibility and Responsiveness: Without direct control over the manufacturing facility, the company will lose some of its ability to respond to disruptions in the supply chain. It may also hurt their ability to respond to demand fluctuations, risking their customer service levels.

GLOSSARY

Benefit

An advantage, help or aid from something Employee benefits and (especially in British English) benefits in kind (also called fringe benefits, perquisites, perqs or perks) are various non-wage compensations provided to employees in addition to their normal wages or salaries. An advantage, help, or aid from something.

Business model

The particular way in which a business organization ensures that it generates income, one that includes the choice of offerings, strategies, infrastructure, organizational structures, trading practices, and operational processes and policies.

Capacity

The maximum that can be produced on a machine or in a facility or group.

Capital

Money and wealth. The means to acquire goods and services, especially in a non-barter system. The uppermost part of a column. Money and wealth; the means to acquire goods and services, especially in a non-barter system. Already-produced durable goods available for use as a factor of production, such as steam shovels (equipment) and office buildings (structures).

Corporate

An incorporated entity is a separate legal entity that has been incorporated through a legislative or registration process established through legislation.

Demand

The desire to purchase goods or services, coupled with the power to do so, at a particular price. The desire to purchase goods and services.

Design

To plan and carry out (a picture, work of art, construction etc. ).

Economies of scale

A process where an increase in quantity will result in a decrease of average cost of production (per unit). The characteristics of a production process in which an increase in the scale of the firm causes a decrease in the long run, average cost of each unit. The cost advantages that an enterprise obtains due to expansion. As the scale of output is increased, factors such as facility size and usage levels of inputs cause the producer’s average cost per unit to fall. The characteristics of a production process in which an increase in the scale of the firm causes a decrease in the long run average cost of each unit. The characteristics of a production process in which an increase in the scale of the firm causes a decrease in the long-run average cost of each unit.

Economy

Collective focus of the study of money, currency and trade, and the efficient use of resources. The system of production and distribution and consumption. The overall measure of a currency system; as the national economy. The system of production and distribution and consumption. The overall measure of a currency system.

Efficiency

The extent to which a resource, such as electricity, is used for the intended purpose; the ratio of useful work to energy expended. The extent to which time is well used for the intended task. Improved efficiency was a principle goal of progressives, one they thought attainable by the application of scientific and rational thought to social problems. The extent to which time is well used for the intended task.

Facility

The physical means or contrivances to make something (especially a service) possible; the required equipment, infrastructure, location etc.

Flexibility

The quality of being flexible; suppleness; pliability. Fluctuation A motion like that of waves; a moving in this and that direction.

Good

An object produced for market.

Intellectual property

Any product of someone’s intellect that has commercial value: copyrights, patents, trademarks, and trade secrets. Intellectual property (IP) is a juridical concept that refers to creations of the mind for which exclusive rights are recognized. Any product of someone’s knowledge that has commercial value: copyrights, patents, trademarks and trade secrets.

Language barrier

A figurative phrase for the difficulties faced when people who have no language in common attempt to communicate with each other.

Lead

Potential opportunity for a sale or transaction, a potential customer.

Lead time

The amount of time between the initiation of some process and its completion, e.g. the time required to manufacture or procure a product; the time required before something can be provided or delivered.

Loss

The negative difference between revenue and expense.

Management

The act of getting people together to accomplish desired goals and objectives using available resources efficiently and effectively. administration; the process or practice of managing. Administration; the process or practice of managing Administration; the process or practice of managing.

Manufacture

The action or process of making goods systematically or on a large scale.

Outsourcing

The transfer of a business function to an external service provider the transfer of a business function to an external service provider. The transfer of a business function to an external service provider.

Performance

The act of performing; carrying into execution or action; execution; achievement; accomplishment; representation by action; as, the performance of an undertaking of a duty. The act of performing; carrying into execution or action; achievement; accomplishment; representation by action, as the performance of undertaking a duty.

Price

The price is the amount a customer pays for the product. The quantity of payment or compensation given by one party to another in return for goods or services. The cost required to gain possession of something.

Process

A series of events to produce a result, especially as contrasted to product. in reference to capabilities, a process is how the capability is executed. An outgrowth of tissue or cell.

Product

Any tangible or intangible good or service that is a result of a process and that is intended for delivery to a customer or end user. a chemical substance formed as a result of a chemical reaction. Anything, either tangible or intangible, offered by the firm as a solution to the needs and wants of the consumer; something that is profitable or potentially profitable; goods or a service that meets the requirements of the various governing offices or society.

Quality control

Quality control (QC) is a procedure or set of procedures intended to ensure that a manufactured product or performed service adheres to a defined set of quality criteria or meets the requirements of the client or customer. A control, such as inspection or testing, introduced into an industrial or business process to ensure quality.

Raw materials

A raw material or feedstock is the basic material from which a good product is manufactured or made, frequently used with an extended meaning. For example, the term is used to denote material that came from nature and is in an unprocessed or minimally processed state; e.g., raw latex, iron ore, logs, crude oil or seawater. A raw material is the basic material from which a product is manufactured or made. Materials and components scheduled for use in making a product. A raw material is the basic material from which a good product is manufactured or made, frequently used with an extended meaning.

Risk

The potential (conventionally negative) impact of an event, determined by combining the likelihood of the event occurring with the impact, should it occur. The potential that a chosen action or activity (including the choice of inaction) will lead to a loss (an undesirable outcome). To incur risk [of something].

Security

The condition of not being threatened, especially physically, psychologically, emotionally, or financially. proof of ownership of stocks, bonds, or other investment instruments.

Services

That which is produced, then traded, bought or sold, then finally consumed and consists of an action or work.

Standard

Something used as a measure for comparative evaluations. A level of quality or attainment.

Strategy

A plan of action intended to accomplish a specific goal.

Supplier

One who supplies; a provider.

Supply provisions

The amount of some product that producers are willing and able to sell at a given price, all other factors being held constant.

Supply chain

A supply chain is a system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer. A supply chain is a system of organizations, people, technology, activities, information, and resources involved in moving a product or service from the supplier to the customer. Supply chain activities transform natural resources, raw materials, and components into a finished product that is delivered to the end customer. A system of organizations, people, technology, activities, information, and resources involved in moving a product or service from the supplier to the customer. A system of organizations, people, technology, activities, information, and resources involved in moving a product or service from supplier to customer. A system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer. is a system of organizations, people, technology, activities, information and resources involved in moving a product or service from suppliers to consumers. A system of organizations, people, technology, activities, information. and resources involved in moving a product or service from supplier to customer.

Wage

An amount of money paid to a worker for a specified quantity of work, usually expressed on an hourly basis.

Franchising

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Franchising is the practice of licensing another firm’s business model as an operator.

KEY Points

• Essentially, and in terms of distribution, the franchiser is a supplier who allows an operator, or a franchisee, to use the supplier’s trademark and distribute the supplier’s goods. In return, the operator pays the supplier a fee.
• Thirty-three countries, including the United States, China, and Australia, have laws that explicitly regulate franchising, with the majority of all other countries having laws which have a direct or indirect impact on franchising.
• Franchise agreements carry no guarantees or warranties, and the franchisee has little or no recourse to legal intervention in the event of a dispute.

Terms

• Franchisee: A holder of a franchise; a person who is granted a franchise.
• Franchising: The establishment, granting, or use of a franchise.
• Franchise: The authorization granted by a company to sell or distribute its goods or services in a certain area.
• Franchiser: A franchisor, a company which or person who grants franchises.

Franchising is the practice of using another firm’s successful business model. For the franchiser, the franchise is an alternative to building “chain stores” to distribute goods that avoids the investments and liability of a chain. The franchiser’s success depends on the success of the franchisees. The franchisee is said to have a greater incentive than a direct employee because he or she has a direct stake in the business. Essentially, and in terms of distribution, the franchiser is a supplier who allows an operator, or a franchisee, to use the supplier’s trademark and distribute the supplier’s goods. In return, the operator pays the supplier a fee.

Subway Franchise – Russia
There are over 22,000 Subway restaurant franchises worldwide.

In short, in terms of distribution, the franchiser is a supplier who allows an operator, or a franchisee, to use the supplier’s trademark and distribute the supplier’s goods. In return, the operator pays the supplier a fee.

Each party to a franchise has several interests to protect. The franchiser is involved in securing protection for the trademark, controlling the business concept, and securing know how. The franchisee is obligated to carry out the services for which the trademark has been made prominent or famous. There is a great deal of standardization required. The place of service has to bear the franchiser’s signs, logos, and trademark in a prominent place. The uniforms worn by the staff of the franchisee have to be of a particular design and color. The service has to be in accordance with the pattern followed by the franchiser in the successful franchise operations. Thus, franchisees are not in full control of the business, as they would be in retailing.

A service can be successful if equipment and supplies are purchased at a fair price from the franchiser or sources recommended by the franchiser. A coffee brew, for example, can be readily identified by the trademark if its raw materials come from a particular supplier. If the franchiser requires purchase from his stores, it may come under anti-trust legislation or equivalent laws of other countries. So too the purchase of uniforms of personnel, signs, etc., as well as the franchise sites, if they are owned or controlled by the franchiser.

Franchise agreements carry no guarantees or warranties, and the franchisee has little or no recourse to legal intervention in the event of a dispute. Franchise contracts tend to be unilateral contracts in favor of the franchiser, who is generally protected from lawsuits from their franchisees because of the non-negotiable contracts that require franchisees to acknowledge, in effect, that they are buying the franchise knowing that there is risk, and that they have not been promised success or profits by the franchiser. Contracts are renewable at the sole option of the franchiser. Most franchisers require franchisees to sign agreements that mandate where and under what law any dispute would be litigated.

GLOSSARY

Interest

The price paid for obtaining, or price received for providing, money or goods in a credit transaction, calculated as a fraction of the amount or value of what was borrowed. The price paid for obtaining, or price received for providing, money or goods in a credit transaction, calculated as a fraction of the amount of value of what was borrowed. The price paid for obtaining or price received for providing money or goods in a credit transaction, calculated as a fraction of the amount or value of what was borrowed. A great attention and concern from someone or something; intellectual curiosity.

Licensing

A business arrangement in which one company gives another company permission to manufacture its product for a specified payment.

Trademark

A word, symbol, or phrase used to identify a particular company’s product and differentiate it from other companies’ products. A trademark, trade mark, or trade-mark is a distinctive sign or indicator used by an individual, business organization, or other legal entity to identify for consumers that the products or services on or with which the trademark appears originate from a unique source, designated for a specific market. It also distinguishes its products or services from those of other entities. A word, symbol, or phrase used to identify a particular company’s product and to differentiate it from other companies’ products.

Business model

The particular way in which a business organization ensures that it generates income, one that includes the choice of offerings, strategies, infrastructure, organizational structures, trading practices, and operational processes and policies.

Controlling

The management function of checking progress against plans to exercise influence over, to suggest or dictate the behavior of, oversee.

Design

To plan and carry out (a picture, work of art, construction etc. ).

Distribution

The process by which goods get to final consumers over a geographical market, including storing, selling, shipping, and advertising. The set of relative likelihoods that a variable will have a value in a given interval. A probability distribution; the set of relative likelihoods that a variable will have a value in a given interval.

Franchise agreement

A legal, binding contract that authorizes a company to sell or distribute another’s goods and services in a certain area.

Good

An object produced for market.

Incentive

Something that motivates, rouses, or encourages. It is used to motivate employees for better performance by providing financial rewards. An anticipated reward or aversive event available in the environment. Something that motivates an individual to perform an action.

Investment

A placement of capital in expectation of deriving income or profit from its use. The expenditure of capital in expectation of deriving income or profit from its use.

Liabilities

Probable future sacrifices of economic benefits arising from present obligations to transfer assets or providing services as a result of past transactions or events. An amount of money in a company that is owed to someone and has to be paid in the future, such as tax, debt, interest, and mortgage payments. an obligation of an entity arising from past transactions or events, including any type of borrowing.

Operation

The method or practice by which actions are done. A procedure for generating a value from one or more other values.

Price

The price is the amount a customer pays for the product. The quantity of payment or compensation given by one party to another in return for goods or services. The cost required to gain possession of something.

Profits

Collective form of profit.

Raw materials

A raw material or feedstock is the basic material from which a good product is manufactured or made, frequently used with an extended meaning. For example, the term is used to denote material that came from nature and is in an unprocessed or minimally processed state; e.g., raw latex, iron ore, logs, crude oil or seawater. A raw material is the basic material from which a product is manufactured or made. Materials and components scheduled for use in making a product. A raw material is the basic material from which a good product is manufactured or made, frequently used with an extended meaning.

Risk

The potential (conventionally negative) impact of an event, determined by combining the likelihood of the event occurring with the impact, should it occur. The potential that a chosen action or activity (including the choice of inaction) will lead to a loss (an undesirable outcome). To incur risk [of something].

Services

That which is produced, then traded, bought or sold, then finally consumed and consists of an action or work.

Standardization

The process of setting certain norms or standards for a product with regard to shape, size, color, quantity, quality, weight etc.

Supplier

One who supplies; a provider.

Supply provisions

The amount of some product that producers are willing and able to sell at a given price, all other factors being held constant.

Licensing

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Licensing gives a licensee certain rights or resources to manufacture and/or market a certain product in a host country.

KEY Points

• Licensing is a business agreement involving two companies: one gives the other special permissions, such as using patents or copyrights, in exchange for payment.
• An international business licensing agreement involves two firms from different countries, with the licensee receiving the rights or resources to manufacture in the foreign country.
• Rights or resources may include patents, copyrights, technology, managerial skills, or other factors necessary to manufacture the good.
• Advantages of expanding internationally using international licensing include: the ability to reach new markets that may be closed by trade restrictions and the ability to expand without too much risk or capital investment.
• Disadvantages include the risk of an incompetent foreign partner firm and lower income compared to other modes of international expansion.

Terms

• Licensing: A business arrangement in which one company gives another company permission to manufacture its product for a specified payment.
• License: The legal terms under which a person is allowed to use a product.

Examples

• Suppose Company A, a manufacturer and seller of Baubles, was based in the US and wanted to expand to the Chinese market with an international business license. They can enter the agreement with a Chinese firm, allowing them to use their product patent and giving other resources, in return for a payment. The Chinese firm can then manufacture and sell Baubles in China.

Licensing

Licensing is a business arrangement in which one company gives another company permission to manufacture its product for a specified payment.
Licensing generally involves allowing another company to use patents, trademarks, copyrights, designs, and other intellectual in exchange for a percentage of revenue or a fee. It’s a fast way to generate income and grow a business, as there is no manufacturing or sales involved. Instead, licensing usually means taking advantage of an existing company’s pipeline and infrastructure in exchange for a small percentage of revenue.

An international licensing agreement allows foreign firms, either exclusively or non-exclusively, to manufacture a proprietor’s product for a fixed term in a specific market.
To summarize, in this foreign market entry mode, a licensor in the home country makes limited rights or resources available to the licensee in the host country. The rights or resources may include patents, trademarks, managerial skills, technology, and others that can make it possible for the licensee to manufacture and sell in the host country a similar product to the one the licensor has already been producing and selling in the home country without requiring the licensor to open a new operation overseas. The licensor’s earnings usually take the form of one-time payments, technical fees, and royalty payments, usually calculated as a percentage of sales.

Batman
The Batman character has been licensed to many companies, such as Lego.

As in this mode of entry the transference of knowledge between the parental company and the licensee is strongly present, the decision of making an international license agreement depend on the respect the host government shows for intellectual property and on the ability of the licensor to choose the right partners and avoid having them compete in each other’s market. Licensing is a relatively flexible work agreement that can be customized to fit the needs and interests of both licensor and licensee. The following are the main advantages and reasons to use an international licensing for expanding internationally:

• Obtain extra income for technical know-how and services.
• Reach new markets not accessible by export from existing facilities.
• Quickly expand without much risk and large capital investment.
• Pave the way for future investments in the market.
• Retain established markets closed by trade restrictions.
• Political risk is minimized as the licensee is usually 100% locally owned.

This is highly attractive for companies that are new in international business. On the other hand, international licensing is a foreign market entry mode that presents some disadvantages and reasons why companies should not use it, because there is:

• Lower income than in other entry modes
• Loss of control of the licensee manufacture and marketing operations and practices leading to loss of quality
• Risk of having the trademark and reputation ruined by an incompetent partner
• The foreign partner also can become a competitor by selling its production in places where the parental company has a presence

GLOSSARY

Interest

The price paid for obtaining, or price received for providing, money or goods in a credit transaction, calculated as a fraction of the amount or value of what was borrowed. The price paid for obtaining, or price received for providing, money or goods in a credit transaction, calculated as a fraction of the amount of value of what was borrowed. The price paid for obtaining or price received for providing money or goods in a credit transaction, calculated as a fraction of the amount or value of what was borrowed. A great attention and concern from someone or something; intellectual curiosity.

Market

A group of potential customers for one’s product. One of the many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange.

Trademark

A word, symbol, or phrase used to identify a particular company’s product and differentiate it from other companies’ products. A trademark, trade mark, or trade-mark is a distinctive sign or indicator used by an individual, business organization, or other legal entity to identify for consumers that the products or services on or with which the trademark appears originate from a unique source, designated for a specific market. It also distinguishes its products or services from those of other entities. A word, symbol, or phrase used to identify a particular company’s product and to differentiate it from other companies’ products.

Capital

Money and wealth. The means to acquire goods and services, especially in a non-barter system. The uppermost part of a column. Money and wealth; the means to acquire goods and services, especially in a non-barter system. Already-produced durable goods available for use as a factor of production, such as steam shovels (equipment) and office buildings (structures).

Export

This term export is derived from the conceptual meaning to ship the goods and services out of the port of a country. to sell (goods) to a foreign country Any good or commodity, transported from one country to another country in a legitimate fashion, typically for use in trade.

Facility

The physical means or contrivances to make something (especially a service) possible; the required equipment, infrastructure, location etc.

Good

An object produced for market.

Intellectual property

Any product of someone’s intellect that has commercial value: copyrights, patents, trademarks, and trade secrets. Intellectual property (IP) is a juridical concept that refers to creations of the mind for which exclusive rights are recognized. Any product of someone’s knowledge that has commercial value: copyrights, patents, trademarks and trade secrets.

Investment

A placement of capital in expectation of deriving income or profit from its use. The expenditure of capital in expectation of deriving income or profit from its use.

Leading

To conduct or direct with authority the management function of determining what must be done in a situation and getting others to do it.

Loss

The negative difference between revenue and expense.

Manufacture

The action or process of making goods systematically or on a large scale.

Marketing

The process of communicating the value of a product or service to customers. Marketing is the process of communicating the value of a product or service to customers. The promotion, distribution and selling of a product or service; includes market research and advertising.

Operation

The method or practice by which actions are done. A procedure for generating a value from one or more other values.

Patent

A declaration issued by a government agency declaring someone the inventor of a new invention and having the privilege of stopping others from making, using or selling the claimed invention for a limited time; a letter patent.

Product

Any tangible or intangible good or service that is a result of a process and that is intended for delivery to a customer or end user. A chemical substance formed as a result of a chemical reaction. Anything, either tangible or intangible, offered by the firm as a solution to the needs and wants of the consumer; something that is profitable or potentially profitable; goods or a service that meets the requirements of the various governing offices or society.

Resource

Something that one uses to achieve an objective. An example of a resource could be a raw material or an employee. Something that one uses to achieve an objective, e.g. raw materials or personnel.

Revenue

Income that a company receives from its normal business activities, usually from the sale of goods and services to customers. The total income received from a given source.

Right

A legal or moral entitlement.

Risk

The potential (conventionally negative) impact of an event, determined by combining the likelihood of the event occurring with the impact, should it occur. The potential that a chosen action or activity (including the choice of inaction) will lead to a loss (an undesirable outcome). To incur risk [of something].

Royalty

Regular payment made from the franchisee to the franchisor for the right to be a franchisee.

Services

That which is produced, then traded, bought or sold, then finally consumed and consists of an action or work.