Question

Answer the following questions.

Explain Licensing and Franchising. Discuss advantages and disadvantages.

Answer 1

Under the licensing model, a domestic manufacturer (licensor) grants licence to a foreign manufacturer (licensee) to use its intellectual properties, such as patent and trademark. It is an agreement between two companies, where one company gives permission to the other to use its patents or copyrights in exchange of some payment.

Advantages of licensing are:
i. Licensing provides an opportunity to the manufacturer to enter foreign markets.
ii. Licensing agreement is less risky since it does not involve commitment of huge funds. It helps the licensee to upgrade his technology and increase the competitiveness.

Disadvantages of licensing are:
i. If dispute arises between licensor and licensee, then the legal costs involved are high.
ii. Licensing can affect the quality of products marketed in different countries.

Franchising is granting of rights by the franchisor (or owner) of a product or service to the dealers or franchisees to use its (franchisor’s) business model in return for monetary consideration. The franchisor may provide assistance in organizing, training, marketing and managing. For example, McDonald’s outlets in India are franchisees of their parent company. The franchisee operations are related to the services business.

Advantages of franchising:
i. It allows the franchiser to maintain standardisation in the products or services of the franchisee.
ii. It provides opportunity to enter foreign market at a low rate of investment.

Disadvantages of franchising:
i. There is a risk of trade secrets being leaked.
ii. The returns to the franchiser are comparatively less than what it could have received had it run its own business.