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FRANCHISING AS A SOURCE OF TECHNOLOGY-TRANSFER TO DEVELOPING ECONOMIES Professor John Stanworth Stuart Price Christine
FRANCHISING AS A SOURCE OF TECHNOLOGY-TRANSFER TO DEVELOPING ECONOMIES Professor John Stanworth Stuart Price Christine

FRANCHISING AS A SOURCE OF TECHNOLOGY-TRANSFER TO DEVELOPING ECONOMIES

Professor John Stanworth Stuart Price Christine Porter Tony Swabe & Dr. Michael Gold

INTERNATIONAL FRANCHISE RESEARCH CENTRE

SPECIAL STUDIES SERIES NO.7 JUNE 1995

PUBLISHED BY UNIVERSITY OF WESTMINSTER PRESS ISBN 1 85919 051 0

THE INTERNATIONAL FRANCHISE RESEARCH CENTRE (IFRC) 1993-2007

University of Westminster, London, UK.

"The International Franchise Research Centre (IFRC) is committed to improving the understanding of franchising. This is achieved by the publication of impartial research and by the encouragement of informed debate."

Franchising operates in a dynamic environ- ment, with new issues and challenges emerging, including: globalisation, coping with competition, disclosure, industry regulation, managing relations with franchisee associations, franchisee recruitment & market saturation.

Against this backdrop, the IFRC was established in 1993 by Professor John Stanworth (Director of the Future of Work Research Group at the University of Westminster), supported by Brian Smith (ex- BFA Chairman, franchisee, franchisor and author), and Chair of its Steering Group.

FOUNDER MEMBERS

Founder members and sponsors included:

Barclays Bank, the British Franchise Association (BFA), Dyno-Rod, Franchise Development Services Ltd., Lloyds Bank (now Lloyds Group), Mail Boxes Etc., Midland Bank (now HSBC), Prontaprint, Rosemary Conley Diet & Fitness Clubs, Royal Bank of Scotland, The Swinton Group, and Wragge & Co.

PUBLICATIONS

Their support enabled the IFRC to publish a number of reports, including its Special Studies Series Papers, journal articles, book chapters and conference papers.

Two IFRC papers received three awards over a period of 12 months (1996-97). The first being Business Format Franchising:

Innovation & Creativity or Replication & Conformity ?, which received the Best International Paper Award in 1996, from the Society of Franchising. This paper also received the Outstanding Paper of 1996 award from Franchising Research: An

International Journal (MCB University Press). Additionally, Franchise Growth And Failure In The U.S. And The U.K.: A Troubled Dreamworld Revisited received the Best International Paper Award in 1997, again from the Society of Franchising. This paper was later published in Franchising Research: An International Journal.

Close links were fostered with universities in Rome and Pisa (Italy), Haute Alsace (France) and Boston, Minneapolis and Texas (USA), with a view to research collaboration. Professor Pat Kaufmann of Atlanta, Georgia, addressed our inaugural annual strategy seminar, in 1994. Overseas speakers in subsequent years included Cheryl Babcock, Director of the Franchising Institute, University of St. Thomas, Minneapolis (1995), Professor Rajiv Dant, University of Boston (1996), Professor Francine Lafontaine, University of Michigan (1997), Professor Claude Nègre, University of Haute Alsace (1997), Colin McCosker, University of Southern Queensland (1998), Professor Frank Hoy, University of Texas at El Paso (1998), Professor Jack Nevin, University of Wisconsin-Madison (1999), Professor Tom Wotruba, San Diego State University (1999), Professor Bruce Walker, University of Missouri, (2000), and, Professor Wilke English, University of Mary Hardin-Baylor (2000).

IFRC members were active supporters of the International Society of Franchising, and hosted the ISoF 2005 conference in London.

The IFRC ceased its research activities in 2007, when John Stanworth took retirement.

Web versions of IFRC Special Studies Series Papers 1993-2001 (listed overleaf)

Many of the earlier papers have been re-set, to allow a successful conversion to Acrobat, and are now available online.

John Stanworth, Emeritus Professor, University of Westminster http://www.westminster.ac.uk/schools/ business

David Purdy, Visiting Fellow, Kingston University http://business.kingston.ac.uk/sbrc December 2010

LIABILITY DISCLAIMER

The information and analysis in each report is offered in good faith. However, neither the publishers, the project sponsors, nor the author/s, accept any liability for losses or damages which could arise for those who choose to act upon the information or analysis contained herein.

IFRC Special Studies Papers 1993-2001

Web versions published online December 2010, via http://www.scribd.com/:

1 The Blenheim/University of Westminster Franchise Survey:

Spring 1993, (Stanworth & Purdy),

1993

2 Improving Small Business Survival Rates via Franchising: The Role of the Banks in Europe, (Stanworth & Stern),

1993

3 Targeting Potential Franchisees:

Industry Sector Backgrounds and Declared Areas of Interest, (Purdy & Stanworth), 1994

4 The Impact of Franchising on the Development Prospects of Small & Medium-sized Enterprises (SMEs) in Europe, (Stanworth & Purdy), 1994

5 The Blenheim/University of Westminster Franchise Survey: A Comparison of UK and US Data, (Stanworth, Kaufmann & Purdy), 1995

6 Developing a Diagnostic Questionnaire as an Aid to Franchisee Selection, (Stanworth), 1995

7 Franchising as a Source of Technology-transfer to Developing Economies, (Stanworth, Price, Porter, Swabe & Gold), 1995

8 Aspects of Franchisee Recruitment, (Macmillan), 1996

9 Business Format Franchising:

Innovation & Creativity or Replication & Conformity ?, (Stanworth, Price, Purdy, Zafiris & Gandolfo), 1996

10 London: A Capital City For Franchisee Recruitment, (Mills, Stanworth & Purdy), 1997

11 The Effectiveness of Franchise Exhibitions in the United Kingdom, (Chapman, Mills & Stanworth), 1997

12 Franchising: Breaking Into European Union Markets, (Stirland, Stanworth, Purdy & Brodie), 1998

13 Succeeding As A Franchisor, (Stanworth & Purdy, published jointly with Business Link London Central),

1998

14 Direct Selling: Its Location in a Franchise Typology, (Brodie & Stanworth), 1999

15 Unravelling the Evidence on Franchise System Survivability, (Stanworth, Purdy, English & Willems), 1999

16 Survey: Professional Services For Franchising In The U.K., (Stanworth & Purdy), 2001

INTRODUCTION

To date, there has been relatively little analysis of the impact and potential of franchising in developing countries. However, in contrast to the dearth of academic and research analysis, the period between the early 1970s and the mid-1990s witnessed a dramatic increase in international franchising activity. This has embraced not only Western Europe but also Asia, South and Central America, Eastern Europe and, to a more modest extent, Africa. In this article, we shall look at some of the benefits and consequences of importing Western (essentially American) franchises into developing economies.

DEFINITION OF FRANCHISING

Franchise operations are a hybrid form of economic organisation, situated between hierarchical and market types. Part of the precise definitional debate has revolved around the disparate business activities which franchising encompasses. The term has, for example, been employed to label business relationships as diverse as the right to broadcast television programmes within certain territories to utilising a complete handed-down franchise business package.

However, a franchise is probably best defined as comprising a contractual relationship between a franchisee (usually taking the form

of a small business) and a franchisor (usually

a larger business) in which the former agrees

to produce or market a product or service in

accordance with an overall 'blueprint' devised

by the franchisor. The relationship is a continuing one with the franchisor providing general advice and support, research and development and help with marketing and advertising. In return, the franchisee usually pays an initial franchise fee and also an ongoing royalty or management service fee,

normally based on the level of turnover and/or

a mark-up on supplies purchased from the

franchisor. The franchisee provides the capital for the outlet and is a legally separate entity to the franchisor (Curran & Stanworth, 1983).

Though the franchisor is usually a 'larger'

business than the franchisee, in only a handful

of cases does the franchisor truly meet the

description of 'large'. Most franchisors in America and Europe remain very much small and medium-sized enterprises (SMEs) with no more than a small handful truly qualifying as large. The latter are almost invariably American in origin, e.g., McDonald's, ServiceMaster, Coke, Pepsi, Holiday Inn, Burger King, Kentucky Fried Chicken, Pizza Hut, Budget Rent-a-Car, Avis.

At one extreme, it has been argued that the franchised enterprise is, in reality, simply a managed outlet featuring in the larger marketing pattern of another truly independent business - that of the franchisor. At the other extreme, the franchised small business may be viewed as an emerging form of independent small business whose distinguishing characteristic is its overt and close relationship with another, usually larger, enterprise.

This association might be seen as being little different, except in degree and the explicit form it takes, to that now found between many small businesses and other firms with whom they do business. In an age of increasing economic interdependence, such a close association may simply be seen as a reflection of the fact that 'no firm is an island entire of itself'. As such, franchising can be viewed as a means of nurturing and developing entrepreneurial talent.

The independence of the small firm can never be absolute and is often difficult to accurately assess in practice. Any small enterprise, whatever its form, is part of a wider network of economic interaction summed up in the economist's notion of 'the market' and, arguably, it is from this source that the main limitations on independence are derived. Whilst economically, franchise relationships may appear to render franchisees highly dependent at a contractual level, at an operational level, higher levels of independence may manifest themselves than appear at first sight likely.

SATELLITESMALLBUSINESSES

Small firms may be categorised in terms of their relationships with the type of market they supply (Bolton, 1971: 31-32) and their reliance upon large firms. 'Marketeers', for instance,

are those firms which actually compete in the same or similar markets as large firms (examples are computer software companies, fashion merchandise manufacturers and restaurants). 'Specialists', on the other hand, are those firms which carry out functions that large firms do not find it economic to perform. These may include large firms amongst their customers (examples are repair and maintenance in the building industry, jobbing engineering and specialised retail outlets such as bookshops).

Finally, and crucially from the viewpoint of the current discussion concerning franchising, are small firms performing the role of 'Satellites' to large firms. Here the small firm is highly dependent upon a single larger business for the majority of its trade. The degree of dependence may be even greater if the large customer actually designs the product or service and merely sub-contracts its manufacture or supply, as appears the case with a franchise.

PRODUCTANDBUSINESSFORMATFRANCHISES

'Product' franchises, embrace the fields of car and petroleum distribution, the soft drink bottlers (Coke, Pepsi, Seven-Up, etc.) and, in the United Kingdom, tenanted public houses (drinking bars). These are often categorised as 'first generation' franchises and are almost totally side-lined from mainstream debates on modern franchising.

'Business format franchises', which have accounted for a great deal of franchise industry growth in recent years, involve a full business system, close on-going franchisor- franchisee relationships and are more service oriented, embracing such areas as fast-food, fast printing, cleaning, hygiene, rental, employment and health services, etc. Business format franchisees are typically SMEs. However, given that the franchisor levies a royalty-based charge on the franchisee's level of turnover rather than profit, pressures to achieve market penetration and growth are institutionalised rather than optional. This can be achieved either by expansion within a given franchise outlet or, alternatively, by expansion of the overall population of outlets - often involving multiple outlet ownership by more successful

franchisees. Multiple outlet ownership is particularly common in the field of fast food franchising where, in the U.S., it is not uncommon for 50 per cent of a franchise company's outlets to be owned by less than 20 per cent (and sometimes less than 10 per cent) of its franchisees. A single large franchisee may own several hundred outlets (Bradach, J., 1994). Multiple ownership in other sectors appears less common.

FRANCHISING AS A MEANS OF IMPORTING ENTREPRENEURIALACTIVITYINTODEVELOPING COUNTRIES

To date, franchising has been developed to a greater extent in the United States of America than elsewhere, despite the fact that the concept had its early origins in Europe. The last 15 years, however, have witnessed an unprecedented spread of franchising across national frontiers, prompted almost exclusively by American franchise companies wishing to cope with problems of market saturation and monopoly legislation at home. Exports by European franchise companies, by way of comparison, range from modest to trivial depending upon the country in question. Countries, such as France, are becoming involved in international franchising activity, but appear to be currently concentrating on ex-colonies and are geared towards serving expatriates.

Franchisor internationalisation began initially by establishing a presence across industrialised nations with developed economies and language/cultural proximity and affinity to the USA. As markets began to become saturated in America, and as the 'export' potential of franchising became more evident, the growth rate accelerated and the global net has broadened. By the end of the 1980s, around 400 American business format franchisors operated over 37,000 foreign outlets covering most major countries of the world (Acheson, 1991:69). Looking at the icon of U.S. business format franchising - the fast-food/restaurant industry - the number of outlets 'exported' to other countries rose from 2,169 establishments in 1974 to 8,485 in 1989 (Horwath International, 1991).

In an increasing number of countries, increasing urbanisation, rising disposable

incomes and expanding consumer markets provide conditions favourable to the growth of franchising. There are a number of ways in which international markets can be penetrated:

franchising "

directly to individuals,

company-owned operations, joint ventures or master franchisors. Many franchisors use more than one method in conducting foreign operations but the most popular, cheapest and fastest method is the master license

technique" (U.S. Department of Commerce, 1988)

Under the 'master licence' technique, a master licensee receives the right to develop

the franchisor's system in a specific country or

region. The U.S. Department of Commerce claims that:

"Compared to other service sectors, the problems of franchise companies in accomplishing international transactions are relatively less

formidable" (U.S. Department of Commerce, 1986)

Walker (1989: 13), examined reasons given by American companies in identifying a

country to receive their first venture in global (non-U.S.) expansion. Perhaps surprisingly,

the reasons given did not reflect the degree of

proactive planning that might have been expected. For instance, 44.0 per cent had

simply responded to a first/only contact from

a foreign 'prospect'. After that came,

'proximity to the USA' (27.6 per cent) and 'similarities to the U.S./English language' with 18.0 per cent combined.

Approaching fifteen per cent of U.S. franchised outlets are now located in LDCs ('Lesser Developed Countries'). Thus, it appears that franchise companies will continue to move into developing countries

when opportunities arise, either on their own initiative or in response to approaches from the countries concerned. Developing countries, in turn, must decide whether the 'know-how' and role model advantages gained

by the import of, usually U.S., franchise

systems outweighs possible disadvantages resulting from the displacement of existing

indigenous businesses and capital outflows in the form of repatriated profits.

U.S.ATTITUDESTOWARDSFRANCHISE

GLOBALISATION

High profile American involvement in international franchising is one which wins favour at the highest levels in the U.S. with strong benefits to the U.S. economy. These have been summarised in a recent analysis by American writer Eroglu (1992: 19):

from "

a balance-of-payments

perspective, international franchising is considered (in the U.S.) as a safe and speedy means of obtaining foreign currency with a relatively small financial investment abroad. It is notable in that it neither replaces (American) exports nor exports (American) jobs, all these reasons making this business arrangement one of the most preferred and government-supported forms of international involvement." (emphases

in brackets added)

The advantages of global franchising to franchisors may be summarised as:

Fewer financial resources required as franchisees incur the majority of the costs involved;

Raw materials can often be produced internally in countries where direct imports are limited;

Less susceptibility to political, economic and cultural risks if ownership is local - property is less likely to be expropriated since franchisees are local nationals;

Franchisees are more familiar with local laws, language, culture, business norms and practices of the satellite country.

However, the risks of employing franchising as a vehicle to international expansion are, from the franchisor's viewpoint:

Possible difficulties in repatriating royalties;

Fig 1 - Problems Encountered by U.S. Firms Establishing Franchises in Foreign Countries

Proportion

of Sample

Government or legal restrictions

59.6%

Difficulties in recruiting enough qualified franchisees

44.2%

Lack of sufficient local funding

36.5%

Difficulty of controlling franchisees

36.5%

Difficulty of redesigning the franchise package to make it saleable to franchisees in foreign markets

28.8%

Trademarks and/or copyright obstacles

28.8%

Difficulties

in

protecting

intellectual property;

copyright

and

Difficulty in policing quality standards;

Unfamiliar laws, regulations, language and business norms;

Difficulties in servicing franchisees;

Local

laws

may

create

terminating contracts;

difficulties

in

An implicit feature of a franchise system is the concept of technological transfer and the 'learning organisation', where technology refers to skills and know-how rather than just machinery and hardware. This broader process relates to methods of organisation and operation, quality control, and various other manufacturing procedures.

Dahlman & Westphal (1983) identify three levels of technology transfer, which it is possible to align to a context of franchise systems:

Creation of local competition as the franchise concept is mimicked.

Level 1

Operating Capability - the

A study on the problems experienced by U.S. firms in establishing franchises in foreign countries identified several major factors (see

capability required to operate a technology, for example, to run and maintain a business unit (such as a quick service restaurant).

Figure 1 - Ashman, 1987).

Level 2

Investment Capability - that

TECHNOLOGYTRANSFER

required to create new productive capacity (or new restaurants).

The transfer of franchise know-how across

Level 3

Innovative Capability - the ability

national boundaries can be viewed as a process providing local franchisees with

to modify and improve methods and products.

access to value-added businesses as well as the marketing techniques and managerial support implicit to firms developed in industri- alised economies. Here, the strength of the franchisor's home base plays an important role in conferring competitive advantages to the franchisee and economic development opportunities to the satellite country.

Whilst all of these levels require different types of skills and support from the franchisor, there is typically a gap between the technological capabilities and infrastructure support of firms operating in the home base and those in other countries.

It is within the franchisor's home base that the infrastructure, such as bank support (Stern & Stanworth, 1994), suppliers and main customers, are most sophisticated and contribute to the rate of diffusion of a particular technology. Sagafi-nejad & Belfield (1980) conclude that there is a positive correlation between levels of economic development and rate of know-how diffusion. With reference to fast food franchises, Yavas & Vardiabasis (1987) established that a positive relationship existed between U.S. franchisor presence and the satellite countries' gross domestic product, levels of urbanisation, population levels, female participation in the workforce and proportion of population aged under the age of 20.

The establishment of a local supplier base means that technological transfers concerning operating capability focus on the day-to-day challenges of maintaining standards, managing staff and selling products in accordance with the franchise agreement and manual. Due to differing levels of develop- ment and customer requirements within LDCs, and some industrial countries, the franchisor may also be required to transfer training and know-how to local supplier firms in order that brand/product consistency and continuity of supply is achieved.

For McDonald's to ensure product consis- tency, brand credibility and standardisation of products in Russia, they had to become a vertically integrated concern (unique in McDonald's). A food processing plant was built by Finnish building contractors and the machinery sourced from the UK and Canada. Product packaging was, initially, imported but is now Russian supplied. McDonald's also had to import potato seeds in order to conform to standards set in the USA. This raw material importation has been mirrored on the entry of Pizza Hut into India. The company imported Canadian-strain wheat which is more suitable to make pizza-dough.

Infrastructure development requirements suggest that the greater the level of experience differential between the transferor and transferee, the higher technological transfer costs will be and the slower the rate of diffusion of a particular technology. Indeed, Davidson & McFetridge (1984) argue that the

extent to which a technology transaction is likely to be burdened by high costs is determined by: (a) the newness of the technology; (b) the extent to which the technology is a departure from the state of art; (c) the proximity and number of technological substitutes; and (d) the amount of previous technological transfer experience of the parties involved.

Pine (1992) argues that, within the context of the international hotel industry, both economic and social characteristics of the transferor and transferee countries should be taken into account when examining technological transfer. He observes that industrialised countries generally spend a greater proportion of GNP on education, provide more tertiary level places for students and have a much lower proportion of adult illiteracy in the population. This enables relatively easier technology transfer within and between such countries than is possible with developing countries. Within Russia and China, for example, many of McDonald's 'crew- members' are university graduates, engineers, doctors and teachers eager to gain experience of western training and managerial techniques which may, in turn, be passed on to other professions. Thus lower educational standards within LDCs may have a detrimental effect on attracting international franchises not only due to cost considerations but because the ability to attain critical mass within such countries may be slower than within developed economies.

This said, some franchise organisations have become increasingly sophisticated in their strategies for developing franchisees' operating ability through the combined use of class-room and hands-on techniques. Historically, franchise training was generally limited to the provision of an operations manual. Contemporary franchisee training, however, is generally performed at or more of the following training facilities: a) at a full- service training centre; b) at an operational outlet with a training capability; c) at an operational outlet run by a certificated franchisee/trainer. Such training techniques tend to be more prevalent amongst the larger franchise organisations and also amongst those with some history of franchising. This means that they are able to train franchisees

from LDCs through employing a variety of techniques. For example, McDonald's actually sent 59 Russian employees for training in Canada and the USA, four of whom graduated from the company's 'Hamburger University' (Price, 1993). As such training techniques emerge over time, there is a positive correlation between the age of a franchisor company and the level of sophistication of franchise training in LDCs.

As business format franchising focuses upon the transfer of know-how, at least at level 1 (above), rather than simple product distribution, it is most likely to have a direct effect on the economic progress of developing countries (Kaufmann & Leibenstein, 1988). Some developing economies are attracted by the notion of importing entrepreneurship and managerial sophistication and aiding its diffusion via equity involvement. For example, McDonald's of Canada owns 49 per cent of the Moscow venture, with the remainder held by Mosbshepit, Moscow council's catering operator. Operating capability is seen as generating a pool of knowledge that may then replicated more generally.

Some Pacific Rim countries, building upon the early learning experiences resulting from the importation of U.S. franchise operations, have added independent investment and innovative capabilities resulting in the emergence of home-grown franchising chains. However, format franchising can often have a lower priority for LDCs who are keener on the importation of know-how from advanced technology firms, rather than franchise retailers.

As many franchisors are relatively young and smallish companies, the costs of tech- nological transfer associated with movement into LDCs may be perceived as prohibitive. Inter alia, it may be argued that one of the reasons for franchisor concentration upon industrialised nations is the lower costs of technological transfer resulting from higher educational standards as well as higher savings ratios - indicating the potential pres- ence of finance available for investment in franchising. However, there may be a technological transfer cost associated with the concept of business format franchising itself. Business format franchising has been actively

employed as a method of expansion amongst U.S. retailers since the 1950s. In many coun- tries, including industrial ones, franchising has yet to emerge as a business concept of any significance. For example, when Kentucky Fried Chicken entered mainland China, they had to virtually introduce the concept of franchising from scratch (English & Xau,

1994).

In addition to employing business format franchising as a form of business growth, there has also been a tendency for franchisors to use it as a capital market. Hence, for smaller franchisors the issue of repatriation of royalties may have been of more importance than for larger franchisor concerns. Although repatriation considerations may, in turn, be a reflection of the relative size of franchisors attracted to LDCs, some franchisors have sought to differentiate themselves according to the investment requirement of franchisees. Thus those franchisors with greater brand capital have higher economic costs of entry. Inter alia, this infers that as investment capability is a form of technological transfer, there may be some difference between the calibre of franchises that gravitate towards LDCs versus those which gravitate towards industrialised nations.

Such effects may be mitigated by the use of specific instruments by LDC governments to facilitate the entry of international franchisors. Beamish (1985) claims that government persuasion/legislation has a significant impact on entry to LDCs compared with developed countries.

Arguably, it is Level 3 (above) of the technology transfer process which is the most difficult to achieve since it requires some alteration to the marketing mix of the franchise in order to adapt to local conditions. To some degree, this is also partially reliant on the cultural proximity and attractiveness of the satellite country which, in part, determines the willingness of the franchisor to accept change. Possibly one of the additional reasons for U.S. business format franchisors' gravitation to developed nations is that they can do so without substantial alteration to the concept. The extent to which standardisation may be realised across marketing mix variables is

partially determined by the cultural and political proximity of the satellite country.

THEINDONESIANEXAMPLE

A recent examination of the progress of franchising in Indonesia (Chan & Justis, 1995) demonstrates a pattern of events now becoming fairly common in developing economies. Until the mid-1980's there were few if any foreign (or indeed home-based) franchise companies registered in Indonesia. There were stringent foreign investment laws and a preference for joint ventures rather than outright foreign ownership. Even joint ventures were restricted to sectors specifically targeted by national government.

Whilst all foreign investment must still receive official approval, the insistence on joint- ventures was relaxed in 1992 and replaced by an agreement that, for sums in excess of $50m targeted towards certain key regions, a project may be 100 per cent foreign-owned with a divestiture of 20 per cent to local ownership over the next 20 years.

Franchisors still face problems with trademark protection and find 'imitation' a common problem. Locals, on the other hand, claim that franchise fee levels are generally too high and franchisee support level generally too low.

Chan & Justis (1995) found that imported franchises were having a useful 'role model' effect in encouraging local entrepreneurs to set up their own franchises and even consider expanding these outside Indonesia. Evidence is not yet available as to whether these local franchisors had previously worked as franchisees in imported Western franchise companies or not but there are now approaching 100 different franchise registered companies, mostly of local origin. These reside almost totally in service categories such as restaurants, retail, hair/beauty salons, real estate and hotels.

THECHINESEEXAMPLE

Despite low income levels in China and the sheer size of the Chinese landmass, U.S. fast-food giants McDonald's and Kentucky Fried Chicken have recently staged enormously successful ventures there. Since

1978, China has moved towards a more market-based economy (English & Xau, 1994). This has involved the acquisition not only of modern industrial technology but also allied managerial and marketing technologies. This, plus a movement towards conformity with international codes of protection of copyrights, trademarks and intellectual property, has created an environment favourable to the movement of franchise companies into China.

Joint ventures have traditionally been a popular method for development by franchisors internationally. In this case, the partner is a state agency. The Chinese government attains domestic investment whereas the franchisor receives financial assistance with the costs of globalisation, plus a sensitivity towards local cultural, political and administrative norms and behaviour patterns.

Local entrepreneurial and managerial talent tends to be in short supply and expatriate visas are rationed, thus enforcing the development of home-grown talent rather than importing entire, and already trained and experienced, managerial teams.

THEBRAZILIANEXAMPLE

Though still viewed as an emerging economy, Brazil is claimed to have the fifth largest franchise industry in the world (behind the U.S., Japan, Canada and France) with approaching 800 franchise systems (Josias & McIntyre, 1995). Whilst Western franchises account for less than 15 per cent of total franchise brand names in Brazil, they nonetheless tend to be amongst the strongest brands with the largest franchise networks. Home-grown franchises embrace niches as diverse as ethnic foods, dental clinics and construction products to cosmetics, playcentres, language school and car rentals.

Proximity to the U.S. plus cultural assimilation factors are claimed to have fostered the rapid growth the franchising in Brazil. Despite Brazil's position in the world league table of franchising, current franchise export levels are estimated to be 'minimal' (Josias & McIntyre, 1995). However, in the longer term, expansion into North American is seen as a 'natural

progression'.

DISCUSSIONANDCONCLUSION

We have stressed the importance of franchising as a form of technological transfer

to developing economies. Some indication

concerning the potential of franchising for growth and entrepreneurial development in developing nations has been given. However, it may well be that, in exchange for exposure to managerial, marketing and consumer know-how which imported franchise systems bring with them, there is a price to pay. The cultural homogeneity which exposure to Western tastes brings with it, the loss of

economic diversity, possible displacement of existing local businesses, the repatriation of fees and profits, plus the notion of control from a distance, all need to be taken into account by policy-makers in developing economies before deciding to either embrace

or reject this source of technology transfer

and know-how.

A frequent source of potential difference

between franchisor and franchisee in developing countries concerns quality. In environments where Western standards of quality may be considered excessive, and where a product/service sells well at a lower and more easily achieved and sustained level of quality, franchisor's stipulated quality standards can come under attack. More seriously, issues such as this tend to highlight cultural differences and the limited flexibility of many franchise packages in adapting to local cultures.

For governments of developing countries who wish to tap the potential of franchising and concentrate on promoting local businesses, whilst resisting the downside factors of imported franchise retail know-how, the 'wholesaler-retailer' franchise model has sometimes proved effective. This has sometimes also served the purpose of promoting ethnic majority businesses in their attempts to compete with those of powerful ethnic minority groups, e.g., Chinese, Indian, Lebanese, etc. Here, retailers can form a wholesaling co-operative capable of yielding economies of scale in purchasing typically beyond the scope of small traders. Alternatively, the 'franchisor' and 'franchisee'

may be separate entities entering into a voluntary relationship. Here, government agencies can take on the role of the franchisor or, alternatively, be instrumental in forming a body which can.

Whatever posture governments of developing economies decide to adopt on franchising, one thing appears fairly certain and that is that franchising as a business concept cannot be indefinitely ignored.

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AUTHORS

John Stanworth is the director of the International Franchise Research Centre and has been engaged in research into franchising since the mid-1970s. He also leads the Future of Work Research Group, based at the University of Westminster, which has a record of specialist research in Teleworking, Small Business Development and Human Resource Management. Studies have been undertaken for many clients, including The Department of Trade & Industry, The Department for Education and The Economic & Social Research Council.

Stuart Price, Christine Porter, Tony Swabe and Michael Gold are members of the London Management Centre, University of Westminster.

INTERNATIONALFRANCHISERESEARCHCENTRE

The International Franchise Research Centre (I.F.R.C.) is committed to improving the understanding of franchising. This is achieved by the publication of impartial research and by the encouragement of informed debate. Membership is suitable for anyone with an interest in franchising and further details are available from the address on the rear cover.

SPECIALSTUDIESSERIES

Papers in the Special Studies Series are supplied free of charge to I.F.R.C. members and are published a minimum of four times a year. They report upon a range of issues which are felt to be of interest to the franchising community. Subject matter includes the findings of surveys of franchisors, franchisees, and potential franchisees, and also special interest matters, such as finance for franchising.

No.1 The Blenheim/University of Westminster Franchise Survey:

Spring 1993

No.2 Improving Small Business Survival Rates via Franchising: The Role of the Banks in Europe

No.3 Targetting Potential Franchisees:

Industry Sector Backgrounds and Declared Areas of Interest

No.4 The Impact of Franchising on the Development Prospects of Small & Medium-sized Enterprises (SMEs) in Europe

No.5 The Blenheim/University of Westminster Franchise Survey: A Comparison of UK and US Data.

No.6 Developing a Diagnostic Questionnaire as an Aid to Franchisee Selection