Useful Notes on Transfer-Related Entry Modes
Another reason to go in for leasing by the private sector companies is that they want to keep their balance sheet clean. They buy the aircrafts and transfer the ownership to the banks and then take aircrafts on lease basis from the banks. International leasing offers many benefits.
First, the ownership of the property lies with the foreign company during the lease period, and the local company pays leasing charges. Second, from the perspective of local company, this mode reduces the cost of using foreign equipment. Third, it mitigates operational and investment risks. Last, it increases the knowledge and experience with foreign technologies and facilities.
A licensing arrangement or agreement refers to “a contractual arrangement in which one firm, the licensor, grants rights to another firm , the licensee, to manufacture, assemble or otherwise use a proprietary product, service patent, brand name or business format. The licensee pays a license fee for a specified period, and pays commission or royalty to the licensor calculated on the basis of unit volume or sales value achieved.”
To the licensor, licensing provides many benefits – i) extra income is generated, ii) established markets, which have been closed or restrictions placed, can be retained, and new markets (otherwise not possible) can be reached, iii) overseas markets, not possible to serve due to domestic limitations, can be served, iv) creates a goodwill for the company’s other products and services, supply of raw material to the licensor, and v) possible infringement of the foreign company’s technology, systems, brand name, etc can be discouraged. However, if the licensee does not maintain proper quality control, the reputation of the licensor gets damaged. It has also been observed that in future the licensee becomes a competitor of the licensor.
Licensing is very popular in electronics, pharmaceuticals, and magazines publishing. Earlier there used to be a clause in the licensing agreement that used to prohibit exports, but most of the states do not agree on the clause.
International franchising refers to granting of specified intangible property rights by a foreign franchiser to a local franchisee, and the franchisee must religiously abide by strict and detailed rules of doing business as prescribed by the franchisor. Franchising offers greater control over overseas operations and longer commitments compared with licensing.
While manufacturers offer licenses, service providers offer franchising. “The biggest difference between franchising and licensing is that the franchisee uses the name of the franchisor. One can see so many Foreign Service companies operating in India through franchising arrangement. Some of the notable names are McDonald’s, Kentucky Fried Chickens, Pizza Hut, Le Meridian, and Best Western.
McDonald’s has roughly 16,000 restaurants in 120 countries. The franchisor receives royalty payments, income generated by sale of contractually required inputs. The franchisee obtains well known brand name supported by national or international promotion; no immediate competition (being one franchise in one locality); receives a package of supplementary services; and receives standardised training in managing the business.
BOT is a “turnkey” investment in which a foreign company is assigned a job in its toality, from design to construction. The big projects involving huge investment, long time, and special skills are the candidates for this kind. Airports, dams, seaports, steel or chemical plants, expressways come under this category. To undertake such projects, often the foreign firms form joint venture with some local firm.