Franchising is used widely by

international franchising

Barry Quinn

THE FRANCHISE METHOD

Franchising has become a major driving force in the globalization of service businesses. Changes in the global trading environment such as the lifting of restrictive legislation and a greater homogeneity in buyer behavior have resulted in the further spread of franchising activity from the developed economies toward emerging markets in Asia, South America, and Europe. While traditionally associated with the fast food restaurant sector, franchising has been increas- ingly employed by companies in a range of sectors, including retailing, hotels, car hire, and industrial services. The term franchising has been used to describe a wide variety of business activ- ities, but the contemporary franchise system commonly in use is known as business format fran- chising. There are clear advantages to adopting franchising as an international expansion vehicle and these are linked to the relatively low financial resources, lower risk, and the local knowledge offered by the franchisee.

INTERNATIONAL EXPANSION

The United States has traditionally been the world’s single largest franchise market. However, franchising is now used widely by US and non-US companies as a strategy for growth in both developed economies and emerging markets. Market saturation has been cited as a key factor for franchisors in the United States, Canada, Western Europe, and Japan (Hoffman and Preble, 2004), and international expansion has generally occurred in markets geographically and culturally close (see MARKETING ASPECTS OF PSYCHIC DIST- ANCE; MARKETING ASPECTS OF CULTURAL DISTANCE) to the home market. For instance, Canada has been the preferred first destination for US franchisors (see, for instance, Walker and Etzel, 1973; Hackett, 1976; Walker and Cross, 1989). Evidence has been found to support the notion that franchising organizations only make international moves after reaching a significant level in their domestic operations (Walker, 1989;

Aydin and Kacker, 1990; Welch, 1990). An initial domestic presence is viewed as crucial for successful international expansion in that it aids the learning process that will be useful for later international expansion and that it creates a widespread network that, by itself, becomes a very tangible statement to potential franchisees, both local and foreign. However, an exception to this ‘‘rule’’ can be seen in the case of retailing companies (see INTERNATIONAL RETAILING). As service sector companies have developed franchise operations in their respective domestic markets, some retail companies only employ franchising as a strategy in international markets. In other words, franchising is adopted as an alternative strategy to the core operating presence developed within the domestic market (Quinn and Alexander, 2002).

EMERGING MARKET OPPORTUNITIES

The fundamentally expansionist nature of fran- chising would suggest that foreign markets will be perceived as providing favorable opportu- nities for growth, regardless of the level of development of the domestic market (see, for instance, Hackett, 1976; Hopkins, 1996). It is increasingly the case that franchisors are looking for opportunities in emerging markets (Welsh et al., 2006) and franchising is being seen as one way for nations to grow their economies. This is the case in Asian markets such as China and Singapore (Choo et al., 2007; Wang et al., 2008). Such markets offer clear oppor- tunities to franchisors, including high growth and demand for western products and services, urban populations, rising middle classes, and attractive legislative environments. Franchising is of great benefit to transitional economies, particularly the former communist economies of Eastern Europe where entrepreneurship and business development skills have been lacking (Welsh and Swerdlow, 1991; Anttonen et al., 2005).

FORMS OF ACTIVITY

Master/area franchising, joint venture fran- chising, direct investment, and direct franchising are the major forms of franchising a firm can choose from when it decides to enter a foreign

Wiley International Encyclopedia of Marketing, edited by Jagdish N. Sheth and Naresh K. Malhotra. Copyright © 2010 John Wiley & Sons Ltd

2 international franchising

market by the franchising route. In master/area franchising agreements, such as those favored by the Body Shop and the convenience store retailer 7-Eleven, the franchisor grants the master fran- chisee the right to subfranchise the franchisor’s concept to others within an exclusive territory, creating a tripartite franchise relationship. For the franchisor, such arrangements mean that most of the work involved in expanding the operation in the foreign market is carried out by the foreign franchisee, thereby reducing the demands on the franchisor. However, control of the quality of the network’s operations is crucial and difficult to maintain (Quinn and Doherty, 2000). The international franchisor will seek to maintain quality and standards through provision of adequate support, in terms of personnel and resources. There is the danger that franchisors may, in practice, underestimate the social, economic, and cultural differences of another country, particularly given the stan- dardization ethos of franchising. This scenario becomes more likely as franchisors seek to avail of the growing opportunities in emerging markets that are generally culturally and geographically distant from the domestic market. Conflict can arise because of the considerable cultural distance (also see MARKETING ASPECTS OF CULTURAL DISTANCE) between the two parties, which increases their tendency to see the same situation in quite different ways. Thus, the strength of the relationship between the franchise partners is of paramount importance.

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