Academic journal article Journal of Small Business Management

Are Franchisors with International Operations Different from Those Who Are Domestic Market Oriented?

Academic journal article Journal of Small Business Management

Are Franchisors with International Operations Different from Those Who Are Domestic Market Oriented?

Article excerpt

This study compares franchisors with international operations with franchisors who are domestic market oriented. Using the existing literature, the author develops various hypotheses and tests them on a sample of 420 franchisors. Findings indicate that franchisors seek international markets after they have saturated domestic markets. Monitoring experience of a franchisor is positively related to the likelihood that a franchisor operates internationally. No differences in franchisee fee were found between franchisors who operate in domestic markets exclusively and those with international operations. Franchisors with international operations have lower royalty rates compared with those that do not.

Introduction

The importance of franchising to the U.S. economy is well documented. Franchising-related sales in the United States are estimated at $800 billion, with more than 2,300 franchisors and 550,000 franchised units across the United States employing about seven million individuals. Similarly, interest in and acceptance of franchising internationally has been showing an increasing trend. For instance, Yum! Brands alone reported opening more than 1,000 international units in just one year. Yum! Brands has nearly 11,000 of its 30,000 units located in over 100 countries (Larson 2002). This trend is not limited to U.S. franchisors alone, but also to franchisors in other countries. For example, non-U.S.-based franchisors like Kumon Math and Reading Centers have successfully established more than 1,000 units in the U.S. market alone (Larson 2003). This pattern of growth is observed across many countries around the world. According to the International Franchise Association, roughly 300 major U.S. companies have international franchise operations (Davis 2001).

Apart from the traditional advantages of franchising that are commonly identified in the literature, international operations offer additional promise for franchisors. International franchising allows for easier growth, as markets are less saturated compared with North American or Western European markets. For instance, well-established franchisors like McDonald's can continue to grow as they have done in previous decades only by moving to markets that are untapped. From its initial spread to wealthier nations, franchising seems to be taking root in newly emerging markets. For example, Malaysia, which had its first franchise in 1946, now has about 300 operating franchise chains, contributing to about 5 percent of the gross national product (Swann 2002). These markets also require less capital for entry as they are in the earlier stages of development and have an untapped latent demand for many products and services that franchisors provide (Alon and Welsh 2001; Davis 2001). International franchising also allows for an efficient transfer of knowledge and business practices from developed nations to emerging markets through the franchisee. Because of this, many emerging economies are adapting to franchising vigorously with active local governmental encouragement (Swann 2002). This promise of efficient transfer of knowledge across borders has led to firms that are not traditionally franchisors to adopt international franchising (Ayal and Izraeli 1990). For example, Starbuck's, which is not a traditional franchisor, has franchised its operations at several international locations (Davis 2001). Another often-ignored advantage of international operations is that it allows the franchisor to learn from international franchisees and markets, which require different adaptation, and subsequently transfer the new ideas to their home operations.

Academic interest in international franchising has been growing since the early 1970s, and a number of studies have been conducted. These will be reviewed in the following section. Despite the existence of many studies on this topic, the author could locate none that compares franchisors with international operations with franchisors who are domestic market oriented. …

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