Academic journal article Management International Review

Determinants of the Rate of Franchising among Nations (1)

Academic journal article Management International Review

Determinants of the Rate of Franchising among Nations (1)

Article excerpt

Abstract

* Prior research has examined why franchisors expand abroad, but no paper has explained why individuals of different nations buy franchises. Using an economic model of why individuals choose to purchase franchises, the paper models the rate of franchising in the work force across nations as a function of economic, strategic, and cultural variables.

Key Results

* Individuals across nations choose franchising when wages in their home nation are low, when unemployment is high, when the target nation is culturally distant from the US, and when opportunity for product differentiation through national media exists.

The choice of entry mode and organizational form by a multinational corporation entering different nations and markets is a central question in international business. One organizational form that has been relatively under-explored in international business is franchising. Franchising is an organizational form chosen by both franchisors and franchisees in order to compete successfully in an industry, typically in retail trade and services. The franchisor, the owner of a trademark and a production technology, grants to the franchisee, typically a local entrepreneur, the right to use the trademark and the technology in a site of the franchisee's choosing, for which the franchisor receives compensation in the form of a lump sum franchise fee and a royalty on sales. As a practical matter, franchising is a large and growing force in the world economy. Although international franchising has occurred since the 1960's, it is now experiencing high growth; Arthur Andersen (1996) recently documented the existence of over 700,000 franchisees across at least 30 nations.

Existing literature, reviewed more fully below, has generally examined the choice of the franchise organizational form using the same theory and constructs as a unitary firm choosing to go abroad (as reviewed in Hoy et al. 2000). But franchising is different. Franchisors are selling a business opportunity, entrepreneurship, and individuals in the target nation must respond. This study seeks to explain why the rate of franchising differs across nations. The paper examines the economic alternatives a franchisee faces, the strategic advantage that franchising gives franchisees, and cultural factors affecting the transfer of the organizational form.

The article is organized as follows. The first section reviews relevant literature, and the second presents theory and hypotheses. Measurement and methodology are then discussed, followed by empirical results. A discussion follows.

Previous Research

Franchising is an organizational form chosen by entrepreneurs in service industries where a decentralized network of units, a "chain," is desirable to achieve competitive advantage. Operating multiple units under a common trademark and a common production system allows for a common consumption experience at different times and places. The reduction in uncertainty through a common consumption experience has value to customers (Caves/Murphy 1976). Local entrepreneurs, termed franchisees, are granted the right to operate one or multiple units of the chain, at a location of their choice while investing their own funds. In return for this right, the franchisee pays the owner of the trademark and production system, the franchisor, a royalty based on gross sales. Profits after expenses (including the royalty) are received by the franchisee as compensation.

The literature on franchising, such as Caves and Murphy (1976), Lafontaine (1992), Michael (1996), and Rubin (1978), is dominated by the question of the franchisor's choice: why would a firm choose to organize as a franchise chain and engage franchisees? Research on why individuals choose to become franchisees is much less common. Peterson and Dant (1990) found that individuals who bought a franchise most value the training received, the greater independence, and the established name of the franchise chain relative to the risk and reward of opening an independent business. …

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