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The Role of Franchising as a Driver of Economic Development for Emerging Economies Marko The Role of Franchising as a Driver of Economic Development for Emerging Economies Marko Grünhagen Southern Illinois University - Edwardsville Carl L. Witte Roosevelt University

“发展就是硬道理” “Development is the cardinal principle. ” Deng Xiaoping “发展就是硬道理” “Development is the cardinal principle. ” Deng Xiaoping

Introduction n Since the end of the Cold War, economies around the globe have Introduction n Since the end of the Cold War, economies around the globe have begun to open their economies n Central & Eastern European countries as well as Asian economies such as China and Vietnam are encouraging market forces to spur economic development n Franchising plays a clear role in this transition n 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 21 st century

Introduction n Conceptual perspective on franchising as a tool for the development of emerging Introduction n Conceptual perspective on franchising as a tool for the development of emerging economies n Restaurant franchise industry as the backdrop n Not all emerging economies are the same n Common characteristics across cultures that show overlap and offer insights

Introduction n Focus is not on franchising simply as a distribution network for goods Introduction n Focus is not on franchising simply as a distribution network for goods or services (“Product & Trade Name Franchising”) n “Business format franchising” (leasing of an entire concept, like restaurants, dry cleaning, hotels) has shown exponential growth over the past three decades globally n Western franchise systems (and U. S. systems in particular) have “internationalized” since the 1960 s n Over 100, 000 franchised units of U. S. franchisors in foreign markets n By the end of 2006, 60% of all U. S. franchisors are expected to have foreign outlets

Subfranchising as an Export n Multi-unit ownership by individual franchisees has become widespread over Subfranchising as an Export n Multi-unit ownership by individual franchisees has become widespread over the past three decades n Three types: area development, sequential and subfranchising (master franchising) n Subfranchising (and corporate ownership) are most frequently used means of franchise expansion globally n Subfranchising: Franchisor grants permission to subfranchisor to franchise on franchisor’s behalf to third parties n Subfranchisor for one or several countries receives share of royalties in exchange for assuming control & franchisor tasks n Advantage of local subfranchisor is seen in knowledge of indigenous market, culture, legal system & HR practices

Franchising’s Prerequisites n Marketers have long claimed that promotions, distribution channels and consumer research Franchising’s Prerequisites n Marketers have long claimed that promotions, distribution channels and consumer research contribute to the development of economies (Dholakia & Sherry 1987, Olsen & Granzin 1990) n Franchising requires functioning infrastructure, legal framework & disposable income (demand) as well as ambitious, entrepreneurially-oriented individuals (Love 1986, Sherman 1993) n Franchised business processes must lend themselves to standardization n Franchising has been shown to be most successful when entering “disorganized” markets dominated by “mom & pop” stores (Raab & Matusky 1987)

Franchising’s Impact n Generally accepted principle that new competition makes established businesses better n Franchising’s Impact n Generally accepted principle that new competition makes established businesses better n Import of Western-style franchising carries promise of providing and/or improving: 1. 2. 3. 4. 5. 6. 7. 8. 9. Technological Advances Know-How and Training Private Enterprise Development Health Standards Customer Service Standards Supply Chains, Logistics and Infrastructure Credit/Lending Legal Standards Consumer Education

1. Technological Advances n Equipment, building design, food technology n “Trial & error” have 1. Technological Advances n Equipment, building design, food technology n “Trial & error” have been endured elsewhere, innovations are implemented without delay (Dwoskin & Havas 1975) n Franchising is “readily acceptable source of technological development” (Sherman 1993) n Diffusion & adoption of technology by imitation, staff turnover and joint venturing

2. Know-How & Training n Product, operating methods, marketing, financing, accounting procedures, monitoring of 2. Know-How & Training n Product, operating methods, marketing, financing, accounting procedures, monitoring of franchisees n Mc. Donald’s operating & training manual with ~1000 pages of rules n Cultural pervasiveness: >7% of the US workforce have passed through Mc. Donald’s quality & value instilling programs n “Franchising transfers across borders a commodity more valuable than capital, labor or land – knowledge. ” Leonard Swartz of Arthur Andersen 1992 n In the West, work force education & professional development programs are believed to increase incomes & living standards

3. Private Enterprise Development n Ownership opportunities for 1000 s of small business people 3. Private Enterprise Development n Ownership opportunities for 1000 s of small business people (Ozanne & Hunt 1971) n Positive socioeconomic consequences (Hunt 1972) on employment, growth, innovation and socioeconomic stability n Many host countries welcome franchises because local ownership is the ultimate non-threatening goal (Semenik & Bamossy 1993) n Franchising as potential means of turning over ownership of previously state-owned enterprises to small business people through indigenous franchising (Zeidman 1991) n Local expertise about laws, customs and culture benefits franchisors (Fladmoe-Linquist 1996)

4. Health Standards n Improvement of food processing hygiene, sanitation (Watson 1997) n Franchisor 4. Health Standards n Improvement of food processing hygiene, sanitation (Watson 1997) n 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) n Local competitors are forced to adopt & imitate imported standards, to the advantage of the broader indigenous market

5. Customer Service n Import of expertise in order processing, service delivery, complaint handling 5. Customer Service n Import of expertise in order processing, service delivery, complaint handling procedures, and customer compensation n Caveat: US customer service standards are occasionally rejected by local consumers as “mechanical”, “exaggerated” or “fake” n “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 & Mc. Keage 1997, Rubin 2001)

6. Supply Chain & Logistics n Business format franchising in particular may be useful 6. Supply Chain & Logistics n Business format franchising in particular may be useful for building a retail distribution network n 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) n Improvements may include increasing reliability of suppliers and cargo handlers, climate-controlled warehousing, and just-intime (JIT) delivery

7. Credit & Lending n Traditional & inflexible lending practices represent hurdles for independent 7. Credit & Lending n Traditional & inflexible lending practices represent hurdles for independent entrepreneurs as well as new franchisees n Banks’ focus on equity collateral rather than future earning potential n Advent of franchising may provide alternative credit options, e. g. , trade credit by the franchisor n 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 Standards n Protection of intellectual property rights & trademarks of paramount importance 8. Legal Standards n Protection of intellectual property rights & trademarks of paramount importance in franchising n Entire business format (inclusive of logo, service mark, business idea, proprietary processes & practices, ingredients etc. ) needs to be protected against imitation n Other related obstacles include cumbersome court registration procedures for start-ups, inflexible real estate tenancy laws & restrictive labor codes (Bohata & Mladek 1999)

9. Consumer Education n Franchising may improve consumer education & public safety n Often 9. Consumer Education n Franchising may improve consumer education & public safety n Often side effects, such as ads for car repair franchises that stress the importance of regular brake inspections or oil changes n Promotional campaigns may provide dietary & nutritional information, frequently in an effort to counteract foreseeable health effects n Actual benefit is seen in raising nutritional awareness among consumers for whom food composition may have not been a concern before n Education of consumers regarding technologically advanced, innovative new product introductions

Implications for China n Ritzer (1995) warns of the “Mc. Donaldization” of the world, Implications for China n Ritzer (1995) warns of the “Mc. Donaldization” of the world, leading to increased “blandness” and reduced quality n We cannot ignore the invasive and possibly negative effects of franchising for indigenous cultures n Yet, franchising (as one phenomenon in the wake of globalization) provides much direct opportunity and observable social benefits for an emerging economy like China n Benefits appear to accrue to individualist as well as collectivist cultures

Implications for China n In individualist cultures, aggressive competition fosters innovation and rewards individual Implications for China n In individualist cultures, aggressive competition fosters innovation and rewards individual achievements n In collectivist cultures, entrepreneurship is supported through the establishment of relational networks and the maintenance of personal ties (“关系” -- “Guanxi” ) n 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) n Requires intellectual property protection for Chinese franchise systems

Implications for China n Franchising’s impact may range from the mundane (e. g. , Implications for China n Franchising’s impact may range from the mundane (e. g. , customer service improvements) to more profound transformations (e. g. , dietary & celebratory customs) n Anecdote: Prior to the introduction of Mc. Donald'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 n 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 n It appears prudent to explore opportunities that franchising may offer in a deliberate and careful fashion

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