9 - Foreign Operation Modes II

This screencasts discusses the contractual relationships, licensing and franchising. In international business both grant foreign partners permission to use the focal firm’s intellectual property in exchange for a continuous stream of payments. Licensing grants a firm the right to use another firm’s intellectual property for a specified period of time in exchange for royalties or other compensation. Franchising allows one firm the right to use another’s entire business system in exchange for fees, royalties, or other forms of compensation. A royalty is a fee paid to the licensor at regular intervals to compensate for the temporary use of intellectual property.

Joint ventures involve sharing ownership with one or more partner firms. The focal firm's ownership is less than 100% and may be less than 50% depending on the country. A disincion must be made between an equity joint venture - a type of partnership in which a separate firm is created through the investment or pooling of assets by two or more parent firms that gain joint ownership of the new legal entity and a non-equity joint venture, project-based ventures or alliances. The definitions in the literature here are inconsistent. Differences lie in the level of commitment, long-term prospects and whether or not a new company is being created.

Foreign Direct Investment or wholly-owned subsidiaries afford an MNC increased control over its international business operations. This video discusses the advantages and disadvantages of the main methods for acquiring wholly-owned subsidiaries, building new facilities (greenfield investments) and buying existing assets (acquisitions/M&A). Compared other forms of foreign operation modes FDI is usually considered to be on the “risky” end of the risk/return continuum.