Contractual Entry Modes (Business & Marketing Essay)

Contractual Entry Modes
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Contractual Entry Modes
With continued globalization, companies are opting to expand their operations and invest overseas. They may do so by engaging in contracts with foreign firms such as issuance of licenses. An international license is an agreement between a foreign company (licensee) and a domestic company (licensor). The licensee benefits by upgrading existing production technologies and also reduce the possibilities of the licensor’s product appearing in the black market. The licensor enjoys capital investment from the licensee which reduce business risks. The major disadvantage of licensing is that a company might end up empowering its future competitors. Licensing might also end up reducing the global consistency of the quality of products.
The other contractual entry is franchising where one firm (franchiser) supplies another(franchisee) with intangible property for some time (Shen et al., 2017). Franchising offers lower costs and risks for entry into new markets and expands the geographic location of a firm. Franchisers also benefit from the know-how and cultural knowledge of local managers. Franchising has shortcomings of management due to a large number of franchisees in the national market. Franchisees might also experience a lack of flexibility in their franchise agreements. An example is the Pizza Hut of America. The owners decided to make it a franchise to increase its operation worldwide.
Under the management of contracts, one firm supplies the other with managerial e...