Franchising Opportunity: Corruption Indices as Measures of Risk and Economic Development in Emerging Markets

Article excerpt

ABSTRACT

A saturated franchise marketplace is developing nationally. American franchising is therefore setting its sights internationally. Even though opportunities in emerging markets are huge, so are the risks. One way of assessing the risk of franchising in emerging markets is to consider the perceived level of corruption in those countries. Three recently developed measures of international corruption are validated and shown to correlate very significantly with gross domestic product per capita. Franchisors need to advise potential franchisees of the differing corruption levels in the various countries they are considering. Corruption can adversely affect product and service quality and adherence to standards set by franchisors.

INTRODUCTION

The potential for expansion of franchises in American markets apparently is stagnating. Franchisors have therefore begun looking to foreign markets to maintain growth. "The choice is either to stagnate or go overseas and grow" argues the president of the president of the Washington, D.C. based International Franchise Association (Martin, 1999). Companies are going abroad for an expanded ownership base and greater profits. The number of U.S. franchise buyers is shrinking very fast (Bennett, 1999), encouraging companies to go abroad.

Part of this movement may be due to the litigious gloom overshadowing U.S. franchising. A dour U.S. government Website at www.ftc.gov leads viewers to case summaries involving franchisors and crafty business developers who have landed in court for attempting to flim-flam opportunities that either: (a) did not exist, or (b) were misrepresented by these "creative" folk. Lawyers profit from these problems.

People buying franchises have to do things exactly the way things are laid out for them. Deviations from the system land franchisees in court (Ryan, Ray & Hiduke, 1999). Unfortunately, current U.S. laws, which purport to regulate franchising effectively, actually legalize rather then restrict abusive franchising practices. Franchisors need only disclose the details of their practices to make them enforceable. No minimum legal standards of fairness exist to protect the legitimate interests of the franchisees (Urlacher, 1999). The U.S. franchising business is regulated both by the individual states and by the Federal Trade Commission. Franchising is supposed to allow franchisees to know the details and risks prior to startup, and the astute franchisor makes this analysis readily available (Bygrave, 1994). Much of the regulation is supposed to ensure that franchisors provide the information necessary for franchisees to make informed decisions. However, franchisees contend that these rules are widely abused (Dollinger, 1999).

Survival rates of U.S. franchises have been argued to be much lower than traditionally reported, and the security that some people associate with franchising is an illusion (Lambing & Kuehl, 2000). Bates (1995) found that of the people who had purchased their franchises in 1987, only 54 percent were still running the business running the business in 1991, 8 percent had sold it, and 38 percent had lost their franchise.

RISKS OF FRANCHISING IN INTERNATIONAL MARKETS

Franchisers must be careful in evaluating franchise opportunities and choosing the best franchising options best for them (Dollinger, 1999). For example, the opportunities in emerging markets are huge but so are the risks. More validated information on these potential risks is needed to help franchisers to make better decisions on which emerging markets are worth the risk. Franchising has been argued to be more risky than exporting and licensing but considerably less risky than joint ventures and alliances (Wild, Wild, & Han, 2000).

The rate of franchising failures is probably higher in developing countries and transitional countries moving from planned to market based economies. Entrepreneurial development in transitional economies, with the exception of Central European countries and China, has been hindered by underdeveloped legal and financial infrastructure and considerable administrative corruption in different government offices. …