Foreign Franchisor Entry into Developing Countries: Influences on Entry Choices and Economic Growth

Article excerpt

The research presented in this article contends that independent businessownership in developing countries can be assisted, but this may be too great of an initial step for prospective businessowners accustomed to traditional employment roles. Franchise acquisition often is a more viable alternative. Through franchising, individuals can acquire needed business skills and experience, which then could be diffused to nonfranchise sectors of the economy. Within this line of argument, propositions are offered and policy implications are described.

In many developing countries, wealth and power have been concentrated in the hands of small groups for several generations or even centuries (Hofstede 1997). Thus, the general populace, for the most part, often has little experience at starting and developing business enterprises, and very few know how to compete in relatively free markets. In efforts to assist developing countries, questions arise as to how the requisite human capital should be developed. Although would-be entrepreneurs could acquire some basic concepts and skills through educational efforts, they still would lack the experience and social networks needed to achieve superior business performance (Castrogiovanni 1996; Cooper, Gimeno-Gascon, and Woo 1994; Robinson 1982). In addition, they may not have the work ethic, risk tolerance, and other personality traits associated with entrepreneurial success (Hisrich and Peters 1989).

Franchising can address these problems because a new franchisee can draw from the experience of the franchisor and other franchisees in the existing franchise network. Through franchising, a prospective businessowner can gain a proven business system, upfront training, and ongoing support. Thus, franchise acquisition is often an easier and less risky route to businessownership than independent business start-up. Consequently, franchising can help foster widespread businessownership in developing countries where ownership and wealth have historically been concentrated in the hands of very few individuals. Furthermore, the business knowledge and skill gained through franchising would subsequently be diffused throughout nonfranchise sectors of the economy as current and former franchisees embark on new entrepreneurial ventures.

To date, however, franchising's potential contribution to economic growth has largely been unrealized in developing countries. Where foreign franchisors have entered such markets, they have tended to establishing firm-owned units, or sell franchises to foreign investors instead of prospective businessowners within the local populace. McDonald's provides a good example.

Prospective McDonald's franchisees must have access to capital in excess of $1 million. Then, they are placed on a waiting list for new franchise opportunities. When they reach the top of that list, they must be prepared to relocate and establish a new franchise wherever the particular opportunity arises. Otherwise, they forfeit the opportunity and are moved back to the bottom of the waiting list.

In developing countries, most prospective franchisees would not have access to sufficient capital to qualify for McDonald's' waiting list. Among the very few who would qualify, the chances are very slim that an opportunity within their home country would materialize at the same time that they reach the top of the list. Consequently, very few McDonald's franchisees in developing countries are drawn from the local populace. Thus, prospective businessowners among the local populace are unlikely to gain business training and experience as McDonald's franchisees.

The purpose of this article is to show how franchising can be used as a tool by government policy-makers seeking to foster economic growth in developing countries. The article examines relationships among economic forces viewed at three levels of abstraction-(1) environment level, (2) network level, and (3) individual level--to clarify the conditions under which franchising is likely to contribute to economic development. …