The Role of Franchising The Role of Franchising as a Driver of as a Driver of Economic Development Economic Development for Emerging for Emerging EconomiesEconomies

Marko GrünhagenMarko GrünhagenSouthern Illinois University - EdwardsvilleSouthern Illinois University - Edwardsville

Carl L. WitteCarl L. WitteRoosevelt UniversityRoosevelt University

““ 发展就是硬道理”发展就是硬道理”““ Development is the Development is the cardinal cardinal

principle.” principle.”

Deng XiaopingDeng Xiaoping

IntroductionIntroduction

Since the end of the Cold War, economies around the globe have begun to open their economies

Central & Eastern European countries as well as Asian economies such as China and Vietnam are encouraging market forces to spur economic development

Franchising plays a clear role in this transition

Franchising as one of the fastest growing U.S. exports may become the chief Western export product to emerging economies at the beginning of the 21st century

IntroductionIntroduction

Conceptual perspective on franchising as a tool for the development of emerging economies

Restaurant franchise industry as the backdrop

Not all emerging economies are the same

Common characteristics across cultures that show overlap and offer insights

IntroductionIntroduction

Focus is not on franchising simply as a distribution network for goods or services (“Product & Trade Name Franchising”)

“Business format franchising” (leasing of an entire concept, like restaurants, dry cleaning, hotels) has shown exponential growth over the past three decades globally

Western franchise systems (and U.S. systems in particular) have “internationalized” since the 1960s

Over 100,000 franchised units of U.S. franchisors in foreign markets

By the end of 2006, 60% of all U.S. franchisors are expected to have foreign outlets

Subfranchising as an ExportSubfranchising as an Export

Multi-unit ownership by individual franchisees has become widespread over the past three decades

Three types: area development, sequential and subfranchising (master franchising)

Subfranchising (and corporate ownership) are most frequently used means of franchise expansion globally

Subfranchising: Franchisor grants permission to subfranchisor to franchise on franchisor’s behalf to third parties

Subfranchisor for one or several countries receives share of royalties in exchange for assuming control & franchisor tasks

Advantage of local subfranchisor is seen in knowledge of indigenous market, culture, legal system & HR practices

Franchising’s PrerequisitesFranchising’s Prerequisites

Marketers have long claimed that promotions, distribution channels and consumer research contribute to the development of economies (Dholakia & Sherry 1987, Olsen & Granzin 1990)

Franchising requires functioning infrastructure, legal framework & disposable income (demand) as well as ambitious, entrepreneurially-oriented individuals (Love 1986, Sherman 1993)

Franchised business processes must lend themselves to standardization

Franchising has been shown to be most successful when entering “disorganized” markets dominated by “mom & pop” stores (Raab & Matusky 1987)

Franchising’s ImpactFranchising’s Impact

Generally accepted principle that new competition makes established businesses better

Import of Western-style franchising carries promise of providing and/or improving:

1. Technological Advances2. Know-How and Training3. Private Enterprise Development4. Health Standards5. Customer Service Standards6. Supply Chains, Logistics and Infrastructure7. Credit/Lending8. Legal Standards9. Consumer Education

1. Technological Advances1. Technological Advances

Equipment, building design, food technology

“Trial & error” have been endured elsewhere, innovations are implemented without delay (Dwoskin & Havas 1975)

Franchising is “readily acceptable source of technological development” (Sherman 1993)

Diffusion & adoption of technology by imitation, staff turnover and joint venturing

2. Know-How & Training2. Know-How & Training

Product, operating methods, marketing, financing, accounting procedures, monitoring of franchisees

McDonald’s operating & training manual with ~1000 pages of rules

Cultural pervasiveness: >7% of the US workforce have passed through McDonald’s quality & value instilling programs

“Franchising transfers across borders a commodity more valuable than capital, labor or land – knowledge.”

Leonard Swartz of Arthur Andersen 1992

In the West, work force education & professional development programs are believed to increase incomes & living standards

3. Private Enterprise3. Private EnterpriseDevelopmentDevelopment

Ownership opportunities for 1000s of small business people (Ozanne & Hunt 1971)

Positive socioeconomic consequences (Hunt 1972)

on employment, growth, innovation and socioeconomic stability

Many host countries welcome franchises because local ownership is the ultimate non-threatening goal (Semenik & Bamossy 1993)

Franchising as potential means of turning over ownership of previously state-owned enterprises to small business people through indigenous franchising (Zeidman 1991)

Local expertise about laws, customs and culture benefits franchisors (Fladmoe-Linquist 1996)

4. Health Standards4. Health Standards

Improvement of food processing hygiene, sanitation (Watson 1997)

Franchisor rules force local suppliers to meet system specifications, e.g., in meat processing, or uninterrupted refrigeration in the supply chain(Schuman and Gibson 1998)

Local competitors are forced to adopt & imitate imported standards, to the advantage of the broader indigenous market

5. Customer Service5. Customer Service

Import of expertise in order processing, service delivery, complaint handling procedures, and customer compensation

Caveat: US customer service standards are occasionally rejected by local consumers as “mechanical”, “exaggerated” or “fake”

“American style” aggressively-friendly salespersons often clash with more “reserved” cultural norms such as the ones in China, the U.K. or New Zealand (Gordon & McKeage 1997, Rubin 2001)

6. Supply Chain & Logistics6. Supply Chain & Logistics

Business format franchising in particular may be useful for building a retail distribution network

Particular importance in markets where such networks are at an elementary level of development, e.g., parts of the former Yugoslavia (Shultz et al. 2001)

Improvements may include increasing reliability of suppliers and cargo handlers, climate-controlled warehousing, and just-in-time (JIT) delivery

7. Credit & Lending7. Credit & Lending

Traditional & inflexible lending practices represent hurdles for independent entrepreneurs as well as new franchisees

Banks’ focus on equity collateral rather than future earning potential

Advent of franchising may provide alternative credit options, e.g., trade credit by the franchisor

European Bank for Reconstruction & Development (EBRD) has played major role in providing alternative credit for small- and medium-sized enterprises in emerging economies of Central & Eastern Europe (Pissarides 1999)

8. Legal Standards8. Legal Standards

Protection of intellectual property rights & trademarks of paramount importance in franchising

Entire business format (inclusive of logo, service mark, business idea, proprietary processes & practices, ingredients etc.) needs to be protected against imitation

Other related obstacles include cumbersome court registration procedures for start-ups, inflexible real estate tenancy laws & restrictive labor codes (Bohata & Mladek 1999)

9. Consumer Education9. Consumer Education

Franchising may improve consumer education & public safety

Often side effects, such as ads for car repair franchises that stress the importance of regular brake inspections or oil changes

Promotional campaigns may provide dietary & nutritional information, frequently in an effort to counteract foreseeable health effects

Actual benefit is seen in raising nutritional awareness among consumers for whom food composition may have not been a concern before

Education of consumers regarding technologically advanced, innovative new product introductions

Implications for ChinaImplications for China

Ritzer (1995) warns of the “McDonaldization” of the world, leading to increased “blandness” and reduced quality

We cannot ignore the invasive and possibly negative effects of franchising for indigenous cultures

Yet, franchising (as one phenomenon in the wake of globalization) provides much direct opportunity and observable social benefits for an emerging economy like China

Benefits appear to accrue to individualist as well as collectivist cultures

Implications for ChinaImplications for China

In individualist cultures, aggressive competition fosters innovation and rewards individual achievements

In collectivist cultures, entrepreneurship is supported through the establishment of relational networks and the maintenance of personal ties (“ 关系” -- “Guanxi” )

Beyond direct economic benefits for the Chinese domestic market, growth of “homegrown” indigenous franchise systems offer export opportunities compared to only exporting goods (e.g., Chinese food, replacement automobile parts)

Requires intellectual property protection for Chinese franchise systems

Implications for ChinaImplications for China

Franchising’s impact may range from the mundane (e.g., customer service improvements) to more profound transformations (e.g., dietary & celebratory customs)

Anecdote: Prior to the introduction of McDonald's in the late 1970’s, most people in East Asia paid little attention to birthdays

“摸着石头过河”“ Cross the river by touching the rocks”

Deng Xiaoping

China’s way has been for a long time the successful merger of traditions and time-honored principles with innovation, new business practices and technology

It appears prudent to explore opportunities that franchising may offer in a deliberate and careful fashion

谢谢谢谢

Thank you!Thank you!