03 Nov The strategic role of economic partners
When establishing and managing a business activity in a foreign country, an Italian company needs to select a team of reliable and expert local partners and collaborators.
There are several types of contracts that can bind a company to a local partner:
International Franchising
The franchisor, i.e. the company interested in establishing itself in a specific foreign country, allows the use of its organisational and trade policy on the basis of an agreement with one or more local franchisees (affiliates), including the right to make use of its know- how, brand and trademark.
The affiliate agrees to pay royalties and support all the investments required to implement adequate marketing of goods. In this type of agreement, the affiliates are located in countries other than the one of the franchisor (parent company), which is able to expand in foreign markets while maintaining “crucial” activities at its own premises.
An international franchising agreement is available only when there are no obstacles to the development of a product and to a standardised brand in the various countries involved.
One of the advantages is the fact that a company can have a particularly wide production range thanks to differentiated distribution between the various affiliates, depending on the needs of each market.
Piggy back
The local manufacturer or distributor offers a foreign manufacturer or distributor the services of its distribution organisation.
Here are, in short, the contents of the agreement defined Piggy Back, which involves two counter-parties: a larger industrial company (carrier), already present in the foreign market, which is in charge of distribution, and an Italian company that wants to enter the foreign market.
The carrier is faced with an important decision, namely, choosing a product that can integrate the range that is already available in order to avoid any overlap with a product that is already on the market.
This agreement is most useful when the distribution system of the market in which a company wants to enter is not easily accessible.
In this case, contacts with the foreign client are only indirect since they are mediated by the carrier, which implements trade policies that the rider often cannot interfere with.
Manufacturing agreements
On the basis of these agreements, a company enters a foreign market by transferring to a local partner the responsibility of the manufacturing process while maintaining control on marketing, distribution and service activities for the end customer. These contracts are limited to the implementation of products abroad, which are then sold on national and international markets.
These include:
– Manufacturing contracts
A company that aims to enter a specific country entrusts a local company with the manufacturing of its products, which are then redelivered to the contractor company that is in charge of managing distribution. In many cases, it may happen that the product is finished by the purchasing company, which enters the market as the official manufacturer. This type of agreement
is used to overcome particularly challenging barriers situated at the entrance of a foreign market or if the size of the market does not justify having a company- owned manufacturing facility. It has many advantages: lower costs for processing, transport and bureaucratic obligations. But there is more to this. Thanks to its flexibility, the duration of the agreement may vary depending on the absorption capacity of the market.
– Licence agreements
According to this agreement, a company (the licensor) grants another company (licensee) the right to use a specific technology, a patented manufacturing process or a brand in order to manufacture a certain product, as well as the right to sell it against payment. A licence is an agreement that involves granting a company the right to use a brand, patent or know-how, therefore it is co-essential compared to franchising, since a licence agreement is always present in affiliate relations.
It is the best solution for entering a foreign market for companies that have substantial resources and expertise. Specifically, the licensor provides the licensee with technology or knowledge, as well as all the skills and information required to use a defined patent. A special form of licence agreement is the so-called cross-licensing, i.e. a reciprocal exchange of licences, in which the parties become licensees of each other.
– Joint-venture
Joint ventures, conceived to organise more permanent modalities of cooperation, have now become Equity joint ventures, which determine the use of a dedicated corporate structure that is jointly controlled by its partners. Hence, this has given rise to a new legal entity involving both companies. The new company is established with mutual consent of the other two companies, which combine resources and expertise in order to carry out specific non-occasional economic activities and achieve common goals. It differs from non-Equity joint ventures, which are contractual and are therefore limited to the fulfilment of a single deal, after which the partnership is over.
The role played by each partner within the initiative varies according to:
a. The capital stock share that each partner company has in relation to the joint venture (which leads to the distinction between majority joint venture and equal joint venture)
b. The degree of involvement in the management of the joint venture
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