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Journal of Small Business Management 2006 44(1), pp.

130–149

An Examination of International Retail


Franchising in Emerging Markets
by Dianne H. B. Welsh, Ilan Alon, and Cecilia M. Falbe

There has been an urgent call from both the franchise industry and the academic
community for research on world franchising markets, specifically in the retail sector.
This article is an attempt to summarize the main research that has been conducted
thus far on international retail franchising. The article begins with an overview of
the development of the literature and then discusses the nature and scope of emerg-
ing markets, with particular reference to their impact on the stakeholders of inter-
national retail franchising. Next, the article develops a conceptual model relating
international retail franchising to its stakeholders. Then, a review of the research is
divided into the areas of emerging world market: Central and Eastern Europe, Mexico
and South America, Asia, and other areas that include India, Kuwait, and South
Africa. The article concludes by discussing the next step to developing a research base
for further understanding of emerging markets in addition to the opportunities and
challenges for retail franchising and future research.

Introduction major focus in the academic franchising


Explaining the phenomenal growth literature over the past three decades.
of retail franchising in the United States U.S. franchising sales increased approxi-
and the United Kingdom has been a mately 94 percent from 1983 to 1993

Dr. Welsh is the James W. Walter Distinguished Chair in Entrepreneurship, professor of man-
agement, and director of the entrepreneurship and family business programs at the University
of Tampa. She is the 2005 president of the U.S. Association for Small Business and Entrepre-
neurship (USASBE) and is on the executive boards for the Entrepreneurship Division of the
Academy of Management and the National Consortium of Entrepreneurship Center Director’s
Association.
Dr. Alon is director of global consulting projects and associate professor of international
business in the Crummer Graduate School of Business at Rollins College. He is the
author/editor of 10 books and over 100 published manuscripts relating to franchising, China,
and business education.
Dr. Falbe is associate professor in the Department of Management, School of Business, and
faculty member of the Organizational Studies Doctoral Program, University at Albany–State
University of New York. Her research interests include franchising, new venture creation, and
strategic change.

130 JOURNAL OF SMALL BUSINESS MANAGEMENT


(Hoffman and Preble 1995). Figures lation but only 25 percent of its gross
vary, but it is estimated that U.S. fran- domestic product (GDP).
chising generates $800 billion worth of Emerging markets are among the
business in gross sales and represents fastest growing targets for investment by
40 percent of the retail trade (Swartz international franchisors. Several surveys
2001). According to Shane and Spell conducted by industry experts showed
(1997), retail franchising “has become that more and more franchisors are
the dominant mode of retail entrepre- seeking opportunities in these markets.
neurship in the United States.” Retail A recent article in Franchising World
franchising is an important and growing stated, “Franchises are springing up in
component of the United Kingdom the most unlikely, and for many of us
economy as well (Boyle 1999). The unheard-of, places. . . . Those franchisors
number of franchising systems in the who can establish a beachhead on these
United Kingdom increased by 30 percent wilder shores could do very well, but the
between 1994 and 1997 (Boyle 1999). risks are great” (Amies 1999, pp. 27–28).
Clarke (1997) estimated that if franchis- A number of authors, both industry
ing was considered in its broader context analysts and academics, have identified
to include tenanted pubs, petrol stations, emerging markets as a topic that needs
car dealerships, and soft drink bottlers, further research (Kaufmann and Leiben-
the total annual franchise sales in Britain stein 1988). Researchers responded to
would be worth 33.3 billion pounds and this call. In 1990 Welsh conducted the
make up around 19 percent of all retail first survey on franchising in Russia, at
sales in the United Kingdom (Boyle the time McDonald’s opened its first fran-
1999). chise in Moscow to a tremendous wel-
In the United States, Canada, and coming by the Russian people and press.
parts of Western Europe, retail franchis- An empirical study was subsequently
ing has reached domestic market satura- published (Welsh and Swerdlow 1991).
tion, while emerging markets remain Since the 1980s, franchising in emerging
relatively untapped. Retail franchises markets has grown dramatically. For
have been established in these markets example, by 1995, there were 26 more
primarily in the last 15 years through franchisors in Brazil alone than there
master franchises and corporate fran- were in all of South America in 1985
chise agreements, and to a lesser extent, (International Franchise Research Centre
joint-venture franchising and conversion 2000). By 1997, the top 50 U.S. food
franchising (Hoffman and Preble 2003; chains had $33.1 billion in international
Alon and McKee 1999; Connell 1999; sales because of the significant efforts
Doherty and Quinn 1999; Hadjimarcou made by large U.S.-based food retail fran-
and Barnes 1998). Emerging markets, chisors (Breuhaus 1998).
which account for 80 percent of the The recent acceleration of franchising
world’s population and 60 percent of in emerging markets is now receiving
the world’s natural resources, present the greater attention in both the academic
most dynamic potential for long-term and practitioner literature. However, this
growth to businesses, in general, and to literature is widely dispersed and, in
franchisors, specifically. The U.S. Depart- some cases, challenging to access. The
ment of Commerce estimated that over first purpose of this article is to provide
75 percent of the expected growth in a review and summary of the literature
world trade over the next two decades on retail franchising in emerging
will come from emerging countries, par- markets. In addition to the traditional
ticularly big emerging countries, which literature searches generally found in
account for over half the world’s popu- leading journals, we also accessed

WELSH, ALON, AND FALBE 131


franchise-specific sources of information Theorists identified franchising as a
that have limited circulation among the hybrid manifestation of the two forms
academic public. The review includes because it has both market-like and firm-
journal articles, all of the proceedings of like qualities (Norton 1988; Brickley and
the International Society of Franchising Dark 1987; Rubin 1978; Mathewson and
from the initial publication in 1986 to Winter 1985). Franchising is seen as a
2002, contributions from Franchising means of obtaining scarce capital, as the
Research: An International Journal, as franchisee is generally required to make
well as articles in recently published a substantial investment in the business.
books on international franchising in Franchisees share risk with the fran-
emerging markets. This article integrates chiser. Franchising is also identified as a
the research that has been conducted in way of addressing the agency problem,
emerging opportunities and threats in specifically, the issue of monitoring man-
expanding economies to help under- agers (Brickley and Dark 1987; Mathew-
stand international retail franchising in son and Winter 1985). Franchisees with
the hope of broadening this area of substantial investments are more moti-
research in the future, as well as assist- vated to maximize revenues through
ing the retail franchise industry. administrative efficiency and protection
The second purpose of this article of the franchise brand while minimizing
is to present a conceptual model of operational costs.
the stakeholders of international retail These earlier arguments apply to
franchising including consumers, franchising in emerging markets, which
franchisees, franchisors, host-country offer even greater challenges in the
markets and home-country markets. The areas of monitoring, resource scarcity,
model provides a means of examining and risk reduction. The issues of moni-
the benefits/costs of international busi- toring and risking are greatly increased
ness format franchising from the per- in international franchising by both
spective of the stakeholders. It also geographical and cultural distance
examines the impact of the complex (Fladmoe-Lindquist and Jacque 1995).
relationships of these stakeholders on The stakeholder model highlights the
the developments in international location of potential problems in moni-
franchising. toring and risking.
We begin with an overview of the Useful reviews of the literature on
development of the literature and a dis- international franchising were published
cussion of the characteristics of emerg- by Elango and Fried (1997) and Young,
ing markets. The article then presents a McIntyre, and Green (2000). In their
model of stakeholder relations in fran- survey of franchising research published
chising and links the stakeholder in journals, Elango and Fried (1997, p.
approach to concepts of international 76) discovered that “the manner in which
retail franchising. We conclude with a franchise systems work to create value
review of the research on area markets had been ignored.” They cited that lack
and offer suggestions for future research. of franchising case studies contributesto
this problem. Their point is especially
applicable to international retail fran-
An Overview of chising and distribution systems world-
the Literature wide. Young, McIntyre, and Green (2000)
Early studies of franchising were examined the content of articles that
linked to the classic argument that eco- were published in the International
nomic organization follows two general Society of Franchising Proceedings. Out
forms: markets and firms (Coase 1937). of approximately 70 articles published

132 JOURNAL OF SMALL BUSINESS MANAGEMENT


between 1987 and 1999, nine dealt with research and evaluation of retail fran-
economies in transition and 14 others chising in these new markets around the
dealt with developing economies. The globe, it is clear that coverage is incom-
authors include a useful table that plete and further research is needed.
arranges international franchise articles
by country/region. Characteristics of
Hadjimarcou and Barnes (1998) found
that international retail franchise expan- Emerging Markets
sion is not just done by the largest fran- While there is no consensus on the
chises, but by all kinds of franchisors that definition of the term “emerging market,”
see international retail expansion as a Czinkota and Ronkainen (1997) identi-
profitable venture and logical extension fied three characteristics associated with
of their home operations. For example, an emerging economy: level of economic
some well-known U.K. retailers, includ- development, economic growth, and
ing the Body Shop, Benetton, and Moth- market governance.
ercare, have used franchising as the
hallmark of their international activity Level of Economic Development
(Doherty and Quinn 1999). The level of economic development is
In The Internationalization of U.S. typically measured in terms of gross
Franchising Systems, Alon (1999) pro- domestic product (GDP) per capita. GDP
vides a comprehensive review of the per capita is a useful measure of eco-
international retail franchising literature nomic development because it is related
and classifies the theories of interna- to the population’s wealth, extent of
tional franchising into two research middle class, and level of industrial and
streams—one focuses on environmental service sector development (Alon and
variables, and the second focuses on McKee 1999).
organizational capabilities of the fran- The usage of the level of economic
chisor. Such theories include the seminal development as a demarcation criterion
works of Hackett (1976) and Welch for distinguishing emerging markets
(1989). Hackett (1976) was one of the equates with the anachronisms of the
first franchising researchers to point out World Bank and the United Nations,
the trend of domestic market saturation which include terms such as less devel-
in the franchising sector that has forced oped countries (LDC’s), third world
franchisors to seek alternate markets, countries, and developing countries. The
especially abroad. Welch (1989) pro- World Bank divides countries on the
posed that franchising follows a life cycle basis of GDP per capita into four classes.
that begins with internationalization into Three of the big emerging countries
industrial markets similar to the United (India, China, and Vietnam) fall into the
States (such as Canada, the United lowest income class, but have seen a
Kingdom, and Australia), continues into surge of growth in recent years particu-
dissimilar developed markets (such as larly in the technology sector. According
Japan), and progresses into emerging to the United Nations, only about 15
markets that are culturally distinct and percent of the world’s population reside
economically less developed. The cycle in developed market economy countries
ends with franchisors from the latter (Czinkota and Ronkainen 1997). When
countries entering the original home considering an emerging market, it is
markets to compete with the founders of important to adjust GDP per capita to
the concept. purchasing power parity in order to
Although academics and practitioners gauge income in relation to the “real”
are beginning to answer the call for more cost of living.

WELSH, ALON, AND FALBE 133


Economic Growth tional investors are the political and eco-
Economic growth is usually measured nomic risks that are introduced by the
in terms of the country’s GDP growth rate. reorganization of economic and polit-
The usage of economic growth is consis- ical units in emerging marketplaces
tent with the concept of “emerging.” Most (Czinkota and Ronkainen 1997). Such
of the countries referred to as emerging risks are systematically evaluated by
markets have enjoyed GDP growth rates western institutions such as the Econo-
exceeding five percent from 1990 to 1997, mist Intelligence Unit, Institutional
with some markets, particularly in East Investor, and International Country Risk
Asia, displaying double-digit growth rates Guide (ICRG). The ICRG is a business-
(Czinkota and Ronkainen 1997). In 1997, venture risk rating system, whereby a
1998, and 1999, East Asia, Brazil, and number value is attached to a foreign
Russia encountered financial crises that country by an independent collaborative
set back their economies’ growth. Such group after many determining factors are
crises demonstrate that the often-touted evaluated and weighed.
high growth rates of emerging markets Market governance influences a wide
may not be sustainable over a long period range of country risk elements such as
of time. government regulation and red tape,
The level of economic growth is political stability, bribery, ownership
among the most important considera- restrictions, controls of capital flows, and
tions for international franchising expan- import restrictions. All these factors are
sion (Alon and McKee 1999). When important to international franchisors’
examining an emerging market’s GDP evaluation of foreign market potential
growth, one must contrast it to the and essential to determinations of fran-
growth in the population. If popula- chise expansion in the international
tion growth rates exceed GDP growth retail arena (Alon and McKee 1999).
rates, then the standard of living in those
countries will actually drop over time.
The most useful measure that captures
A Stakeholder Model of
both growth rates is GDP per capita International
growth rate. Franchising
The stakeholder approach to manage-
Market Governance ment views the consumer holistically
The third criteria for judging emerg- within the context of the environment.
ing markets is the country’s market gov- The company must take into account not
ernance. Market governance includes the only the shareholders and ultimate con-
level of free-market activity, government sumers, but also any group directly or
control of key resources, stability of the indirectly affected by the firm’s business
market system, and the regulatory envi- maneuvers. The general public, for
ronment. Countries that are liberalizing instance, may be interested in how the
their economic institutions and democ- foreign company might promote or
ratizing their political structures are defeat the country’s economic goals, or
often referred to as transitional simply might inquire how much pollu-
economies/countries. These transitions tion is incurred. In either case, the
have been welcomed by the western company’s decisions affect the public
economies and are regarded as opportu- welfare, and possibly individual rights.
nities for international retail franchising Therefore, a prudent corporation explor-
expansion. ing new borders should attempt to take
Among the most important transi- into account all possible scenarios or
tional elements with respect to interna- may suffer irreparable consequences.

134 JOURNAL OF SMALL BUSINESS MANAGEMENT


Hence, this article proposes the stake- In emerging markets, retail franchis-
holder model, which illustrates interna- ing allows companies to expand con-
tional retail franchising in emerging sumer offerings in geographical markets
markets from the viewpoint of the fran- with relatively minimal financial invest-
chisor, franchisee, host market, home ment and risk. Local franchisee owner-
market, and consumer (see Figure 1). ship not only promotes political and
The perspective focuses on the key cultural acceptability, but also decreases
stakeholders of international retail fran- some of the negativity surrounding the
chising in emerging markets and dis- purchasing of products not produced in
cusses how they relate to each other the home country. In addition, it lowers
according to the current research on much of the political risk surrounding
international retail franchising. foreign investment. The franchisor has
the opportunity to acquire a broad base
Franchisors of knowledge concerning local customs
Emerging markets offer a number of and market conditions, economic net-
advantages to franchisors. They include, works, political affiliations, and industry
but not limited to, an expanding middle experience of the franchise partner,
class necessary for retail franchising to which can greatly enhance the possibil-
excel, relatively unsaturated markets, ity of success for both the franchisor and
urbanized and highly populated cities for franchisee(s). Brand-name recognition
the most part, a growing youth market, and customer loyalty is greatly enhanced
free-trade zones, relatively friendly busi- through standardized customer service
ness laws, liberalized markets and tran- that leads to shared long-term success.
sitioning economies, and a huge pent-up Stanworth, Price, and Purdy (2001)
demand for western-style goods and summarized the advantages of global
services. franchising to the franchisor as follows:

Figure 1
International Franchising Interactions in
Emerging Markets

Global Consumer Markets

Host Country
Home Country
Master
Franchisee
Franchisor
Franchisee Franchisee

Franchisee

WELSH, ALON, AND FALBE 135


(1) fewer financial resources required; evident in the numerous examples of
(2) raw materials can be produced inter- false starts and restarts that franchisors
nally; (3) less susceptibility to political, have made in some emerging markets.
economic, and cultural risks; and (4) Overall, the chances of succeeding are
franchises are more familiar with local greatly increased by the globalization of
laws, language, culture, and business consumer markets and the past successes
norms and practices. Risks to the fran- in reproducing the business format in
chisor include the following: (1) possible heterogeneous locations around the
difficulties in repatriating royalties; (2) globe.
protecting copyright and intellectual Kaufmann and Leibenstein (1988) dis-
property; (3) policing quality standards; cussed fringe franchisors that are not
(4) understanding laws, regulations, lan- reputable. Although theory and research
guage, and business norms; (5) servicing is based on the assumption that the fran-
franchisees; and (6) terminating con- chisor is a respectable, sound company
tracts and local imitations. with a proven concept, format, and
One downside of franchising in history of support, this is not always true.
emerging markets from the perspective Kaufmann and Leibenstein reiterated that
of the franchisor is the capital controls disclosure statements are a must for gov-
that may inhibit repatriation of fees and ernments to require when a retail fran-
royalties, which may drastically reduce chise enters the country, and they also
the economic benefits of the investment. stressed the importance of such docu-
Legal constraints, bureaucratic condi- mentation to reduce a franchisee’s risk.
tions, changes in the legal environment,
unstable political leadership, limited Master Franchisees
infrastructure, sporadic enforcement of Indirect franchising, that is, the use of
established laws, particularly with regard a master franchisee to develop a territory
to business ownership and operations, or a whole country is a common strategy
all have the effect of impeding interna- employed by franchisors in emerging
tional franchise expansion. In the area of markets. Nair (2001) noted that the
intellectual property, legally protecting advantages of this system include access
international copyrights, trademarks, and to resources, knowledge of the local
patents is difficult and expensive. market, more adaptation, and the possi-
Another perceived challenge involves the bility of developing a successful fran-
continuous training, monitoring, and chise as a tool for selling to prospective
controlling of international franchisees. franchisees. The indirect system also has
This is exacerbated by differences in disadvantages, including lower profits for
cultures that affect the franchisor– franchisors and franchisees, and moni-
franchisee relationship. toring issues because of loss of control.
There have been numerous examples of
Franchisees a master franchisee holding the sub-
The emerging-market franchisee ben- franchisees hostage to compete against
efits from ongoing support in terms of the franchisor. Ultimately, success will be
periodic systemwide programs and pro- determined by the energy, capabilities,
motions, new product innovations and and resources of the master franchisee.
development, superior market research,
and advice. In some instances, because Franchisor–Franchisee
of the differences in host-country envi- Relationships
ronment, various experiences of the fran- New symbiotic relationships are
chisor may not be transferable from one created when retail franchising expands
country to another. This is particularly into developing countries. Retail fran-

136 JOURNAL OF SMALL BUSINESS MANAGEMENT


chising allows firms to achieve the ment, and western-style marketing tech-
expanded reach and efficiencies associ- niques, all of which increase the skill
ated with internationalization more base of local labor. There are increasing
rapidly and effectively than the firms efficiencies that result from innovation
could accomplish on their own. Dana, and rationalization in all sectors of the
Etemad, and Wright (2001) and Etemad, economy—retail, wholesale, and manu-
Wright, and Dana (2001) developed an facturing. This leads to further develop-
Interdependence Paradigm to explain ment of the host country’s infrastructure,
these franchise marketing networks using particularly in the areas of transportation
examples of firms in South Korea and the and supplies. Alon (2004) examined the
Philippines. In their paradigm, franchis- macro-environmental impacts of fran-
ing involves a network of franchisees chising on the host and home markets
under the guidance of a parent firm, the and included in his analyses economic,
franchisor. Franchisors that are well political, and social ramifications, both
established can achieve greater efficien- positive and negative. He concluded that
cies by incorporating smaller franchisees the probable overall impact, however, is
from emerging markets into international positive in the long term.
franchise networks. Importantly, the Governments have increasingly
authors pointed out that franchising can become aware of the benefits that fran-
help overcome local ownership require- chising has to offer to their country. As
ments in regulated sectors. Therefore, a result, many governments are in the
franchising enhances the competitiveness process of improving their country’s
of franchisors, while contributing to business environment to attract high-
the development of emerging markets. quality franchises. The improvements
A “symbiotic interdependence” forms have included positive legislation for
between franchisors and franchisees in franchise regulations, establishing
a network. Dana, Etemad, and Wright support organizations, trade associa-
(2001) view the consequences of this par- tions, and franchise education programs.
adigm shift from independence to inter- In many cases, foreign governments have
dependence to be far-reaching and funded programs to encourage economic
having a major impact on the way busi- development through retail franchising
ness is handled internationally. in emerging economies, such as the U.S.
Agency for International Development
Host–Home Country Markets (USAID) programs in the former Russian
and Influences Republics.
Franchising in emerging markets also On the other hand, retail franchising
offers the host countries certain advan- may have adverse effects on the host
tages. These benefits include obtaining market. Retail franchising can sometimes
foreign currency with little capital outlay, supplant traditional and local cultural
increases in employment, and thereby, elements, which over time can lead to
growth in the franchisor’s tax base and homogenization and westernization of
gross domestic output. Also, franchise preferences, especially among the youth.
growth and development spawn entre- The older generations and the political
preneurial development comprised of establishments often resist such cultural
small and medium enterprise networks. shifts.
Certainly, “home grown” franchises are International retail franchising often-
more likely to develop. There is a result- times has the effect of displacing local
ing increase in the knowledge base of industry, particularly “mom-and-pop”
the business population concerning stores. These stores cannot effectively
product distribution, market manage- compete with the distribution and mar-

WELSH, ALON, AND FALBE 137


keting expertise of multinational fran- peripheral elements (“menu modules”).
chisors. At the national level, franchising Haueter (1983) was the first to develop
can negatively influence the host this concept of core elements. Thompson
country’s balance of payments over time and Merrilees (2001) applied this
because of the repatriation of fees and modular concept to three international
royalties by the franchisor. retail franchise cases: McDonald’s (U.S.),
Cash Converters, and CarLovers (both
Global Consumers Australian). Through these case studies,
Overall, franchising worldwide has the authors made a case for the applica-
had the effect of offering consumers bility of this modular approach to inter-
lower prices through efficient distribu- national franchise research, regardless of
tion of goods and services, and consis- the franchising system’s origin. They
tent quality through standardization. This argued that all franchisors contemplat-
has been particularly true with the ing internationalizing into emerging
expansion of retail franchising. It is ques- markets could benefit from having a
tionable if these two areas, higher quality system containing these three modular
and lower prices (that is, consumer subsystems—marketing, branding, and
value), would have improved at the rate operations. Each subsystem requires a
that they have throughout the world “core” and also needs to contain “menu
market without retail franchising. elements.” The host country’s culture was
The efficiencies from the technologi- cited by the authors as a critical element
cal and digital revolution will probably for successful franchise development.
lower costs even more for consumers. Emerging markets are heterogeneous
Increased retail franchising in the devel- rather than homogenous in nature. The
oping world will provide the data neces- authors believed that culture itself will
sary for researchers and for the determine the way in which menu items
host-country government to determine are determined because of this hetero-
the impact of retail franchising on eco- geneity. They call for further research to
nomic development. Such empirical include these key concepts in model
research is badly needed. development.

A Model of International Practice and Theory Development


Retail Franchising Authors have also examined why
Model Development retail franchising has had such an impact
There are two major models that have internationally and what forms retail
been developed in the area of retail fran- franchising has taken in different parts
chising. In the first, Alon (1999) devel- of the world. Grimaldi (1992) analyzed
oped and tested a model of international the opportunities for retail franchising
franchising based on the literature of in free-trade zones. Kaufmann (2001)
agency and resource-based theories that inspected the issues of cultural and legal
utilizes organizational characteristics— differences in the age of the Internet and
size, age, growth rate, fees, and royalties, the impact of retail franchising on host-
combined with physical dispersion—to country development. Specifically, he
explain the internationalization of U.S. investigated already proven concepts in
franchisors. The second approach exam- retail franchising, modes of entry, cul-
ined marketing through a modular tural and legal differences, host-country
system as the standardization of the core development, and technological ad-
elements (“absolutely must have vances. The purpose of the article was to
modules”) with the option to adapt begin examining the benefits and costs

138 JOURNAL OF SMALL BUSINESS MANAGEMENT


of international business format fran- World Market Areas
chising from the perspective of three Table 1 summarizes international
major constituencies—the host-country retail franchising articles by world
government, the local franchisee, and the market, year published, title of article,
international franchisor. Integral to this and author(s). These articles are
discussion was the adaptability of the reviewed in the succeeding sections.
franchise systems to the various cultures,
legal frameworks, and economic issues Central and Eastern Europe
in developing countries. Nitin Sanghavi’s (1997) article, “The
Stanworth, Price, and Purdy (2001) Use of Franchising as a Tool for SME
deemed retail franchising as a means of Development in Developing Economies:
technology transfer for developing A Case of Central European Economics,”
economies. Their article explored the gave his personal perspective on the use
background inherent in the internation- of retail franchising as an economic-
alization of retail franchising, including development tool from his numerous
favorable factors to growth, benefits to experiences with those countries. He
developing economies, other conse- summarized the current state of retail
quences to developing economies, franchising in Eastern Europe as com-
advantages and risks to franchisors, as pared to 1997 when he first looked at the
well as government action to encourage topic.
retail franchising. The authors recog- Swerdlow, Roehl, and Welsh (2001)
nized factors that are favorable to the and Alon and Banai (2001) in their
growth of retail franchising as growing respective articles, “Hospitality Franchis-
urbanization, rising disposable incomes, ing in Russia for the 21st Century: Issues,
and expanding consumer markets. The Strategies, and Challenges,” and “Fran-
benefits to developing countries were chising Opportunities and Threats in
identified as managerial, marketing, and Russia,” gave us a historical review of
consumer know-how. franchise development in Russia, as well
Other consequences to developing as a current and future look at the
countries with the entry of retail fran- prospects for retail franchise develop-
chising were cultural homogeneity by ment in an area of the world that barely
exposure to western tastes, loss of eco- realizes its full potential as an economic
nomic diversity, possible displacement of power. Both articles examined the post-
existing local businesses, repatriation of communist economy with a focus on
fees and profits, and notions of control environmental factors associated with
from a distance. Government action to international retail franchise develop-
encourage retail franchising was cited as ment and entry strategies, which poten-
the relaxation of legislation to allow tial franchisors would find successful.
foreign ownership, and conformity with The articles included some practical sug-
international codes of copyright protec- gestions for those entering and maneu-
tion, trademark rights, and other forms vering through this huge market. Skip
of intellectual property. The authors con- Swerdlow and Dianne Welsh, along with
ferred special insight into Indonesia, coauthors, published a number of arti-
China, and Brazil. The authors used the cles in the early 1990s examining fran-
example of Indonesia and China to illus- chising in the former U.S.S.R. that are
trate the government’s action to encour- summarized in the aforementioned
age retail franchising. The article closed article (Swerdlow and Bushmarin 1994;
with the call for the development of Welsh and Swerdlow 1993, 1991;
models, theory, and research in emerg- Swerdlow and Welsh 1992). Christy and
ing franchise markets. Haftel (1992) also summarized the early

WELSH, ALON, AND FALBE 139


Table 1
Summary of U.S. Published Articles on Franchising in
Emerging Marketsa
Year Title Author(s)

1988 Franchising in Asia Justis, Neilson


and Yoo
1988 International Business Format Franchising and Retail Kaufmann and
Entrepreneurship: A possible source of retail Leibenstein
know-how for developing countries
1990 Franchise Management in East Asia Chan and Justis
1991 Opportunities and Challenges for Franchisors in the Welsh and
U.S.S.R.: Preliminary Results of a Survey of Soviet Swerdlow
University Students
1992 The Future of Franchising in the U.S.S.R.: A Swerdlow and
statistical Analysis of the Opinions of Soviet Welsh
University Students
1992 Franchising Opportunities in the Free Trade Zones Grimaldi
of Developing Countries
1992 Pizzas in Mexico? Si! Willems, English,
and Ito
1992 Franchising Entry and Developmental Strategies in Christy and
the Former Soviet Union Haftel
1993 Pizza Hut in Moscow: Post-coup System Development Christy and
and Expansion Haftel
1993 A Cross Cultural Study of American and Russian Welsh and
Hotel Employees: A Preliminary Review and Its Swerdlow
Implications for Franchisors
1994 A Survey of Franchising in Singapore Chan, Foo, Quek,
and Justis
1994 Franchising in China: A Look at KFC and McDonald’s English and Xau
1994 Does Business Format Management Master Marxism Swerdlow and
in Post-Coup Russia? Bushmarin
1995 Franchising in Brazil Josias and
McIntryre
1995 Franchising in India: An introduction Paswan and Dant
1995 Franchising in Indonesia Chan and Justis
1996 Franchising in South Africa Scholtz
1996 Franchising into Asia: An Overview of Selected McCosker
Target Markets
1996 Local Franchising Development in Singapore Goh and Lee
1996 The Case of the Elegant Shoplifter, Shuwaikh, Kuwait Welsh, Raven,
and Al-Bisher
1997 Franchising as a Tool for SME Development in Sanghavi
Transitional Economies: The Case of Central
European Countries
1997 An Overview of South African Franchising Scholtz

140 JOURNAL OF SMALL BUSINESS MANAGEMENT


Table 1
Continued
Year Title Author(s)

1998 NAFTA and Franchising: A Comparison of Franchisor Falbe and Welsh


Perceptions of Characteristics Associated with
Franchisee Success and Failure in Canada, Mexico,
and the United States
1998 Franchising in Slovenia: Support to the Development Pavlin
of Franchise Systems in Central Europe
1998 Case Study: Strategic Alliances in International Hadjimarcou
Franchising—the Entry of Silver Streak Restaurant and Barnes
Corporation into Mexico
2000 New Trends in Slovenian Franchising Pavlin
2000 International Franchising: Evidence from U.S. and Lafontaine and
Canadian Franchisors in Mexico Oxley
2001 International Franchising in China: An Interview with Alon
Kodak
2002 American Franchising Competitiveness in China Alon, Toncar,
and Lu
2005 The International Business Environments of Anttonen,
Franchising in Russia Tuunanen, and
Alon
2005 Real Estate Franchising: The Case of Coldwell Banker Alon and Bian
Expansion into China

a
The authors do not intend for this list to be comprehensive. For a complete cita-
tion, see the Reference list.

Russian market place in an article. The been developing franchises in Bulgaria


next year, Christy and Haftel (1993) pub- for over 25 years, the market has
lished the only case study on franchising remained sluggish, given the government
in Russia in the early era, Pizza Hut system and bureaucracy. However, the
entering the Moscow market. Today’s article described a number of positive
Russia is much different, both politically elements and success stories that gave
and economically. Anttonen, Tuunanen, reasons to be optimistic concerning the
and Alon (2005) provided an up-to-date future of retail franchise development in
examination of the opportunities and Bulgaria.
threats in the Russian franchising market. Viducic and Brcic (2001) described
Despite much of the liberalization, many the two types of franchise arrangements
obstacles still remain. that are prevalent in Croatia, using the
Nedialkova (2001) specifically ex- examples of McDonald’s and Diner’s
amined franchising opportunities in Club. Primarily, retail franchising has
Bulgaria, with a focus on the macro- taken the form of several corporate facil-
economic factors of the Bulgarian ities in operation, where local interaction
economy associated with retail franchis- with the store is limited to employment,
ing. While international investors have not ownership. The second form takes

WELSH, ALON, AND FALBE 141


on an entrepreneur as a franchise holder and the host governments is warranted.
with the understanding that his capital The article gives a realistic view of the
involvement will increase over time as risks and rewards of retail franchising
well as his ownership interest as a full and a bountiful amount of information
franchisee. Furthermore, the article elab- for those contemplating retail franchising
orated on the current state of Croatian in Mexico.
franchise activity and other forms of Hadjimarcou and Barnes (2001)
market expansion that have been suc- explained the expansion process of a
cessful in Croatia. relatively new and small franchisor,
Pavlin (2001) empirically analyzed the Silver Streak Restaurant Corporation,
current condition of Slovenian franchis- into Mexico in a case study. Silver
ing. Using the definition of franchising Streak Restaurant Corporation originally
adopted by the European Franchise Fed- opened their first franchised restaurant
eration, there are currently over 40 oper- in 1996 in Juarez, a city with 1.5 million
ating franchise systems in Slovenia. He inhabitants on the border of the United
compared these results to studies he con- States (Hadjimarcou and Barnes 1998).
ducted on Slovenian franchising that The authors explained the cultural chal-
were published in 1998 and 2000. In lenges of entering Mexico, the company’s
1998, there were 40 franchises operating efforts to identify a suitable partner in
in the country, of which 20 participated the host country, the adaptation of the
in his survey on the current state of fran- concept to address differences in the
chising. The article included results from new market, and the multitude of crucial
a recent survey of prospective Slovenian decisions that must be made when going
franchisees, identifying their core attrib- international. The authors discussed the
utes and offering a framework for recent changes in the law that favor fran-
profitable future development of the chising, as well as the role that strategic
franchise industry in Slovenia. alliances played in the success of their
international franchise efforts. Implica-
Mexico and South America tions for both research and practitioners
Three articles focused on different are explicated.
aspects of Mexican franchising. Teegan Welsh (2001) updated a study con-
(2001) examined foreign expansion and ducted by Falbe and Welsh (1998) that
market entry from three different per- was the first to examine the effect, if any,
spectives. The first perspective is the of the North American Free Trade Agree-
Mexican franchisee that might purchase ment (NAFTA) on franchisor perceptions
the rights to a U.S.-based franchise. The of characteristics associated with fran-
second perspective is the U.S. franchisor chisee success and failure in Canada,
that might sell the rights to their busi- Mexico, and the United States. The orig-
ness format. The third perspective is the inal research addressed two key issues in
host government, namely Mexico, in franchising. First, was to examine the
terms of the economic impact and devel- extent of the franchisee study’s success
opment within their country. The author and failure by analyzing franchise exec-
shared the results of a survey of over 70 utives’ perceptions of the importance of
Mexican franchisees of U.S.-based fran- a number of characteristics associated
chise systems. Results showed the com- with franchisee success and failure.
monly held beliefs within both the Second, was to examine differences
United States and Mexico concerning the among the executives’ perceptions of
desirability of retail franchising as a these characteristics based on the loca-
mode of market entry, and that caution tion of the franchisor—Canada, Mexico,
on the part of franchisees, franchisors, or the United States. Their study found

142 JOURNAL OF SMALL BUSINESS MANAGEMENT


that the respondents’ perceptions of the the major franchises that existed, the dif-
importance of system quality, brand ferent types of franchises, and the nature
name, local environment and communi- and characteristics of franchise agree-
cation, and other scales of franchisor and ments in Singapore. Subsequent to an
franchisee activities, differed by country earlier study that examined franchising
of origin. In addition, the study’s results in East Asia, in general (Chan and Justis
displayed that neither business type nor 1995), Goh and Lee (1996) surveyed 62
franchise size had any effect on per- franchisors in Singapore. They assessed
ceptions of success or failure. Welsh the state of retail franchise development
examined the research that has been as well as franchise fee structures, the
conducted since the study appeared in prevalence of homegrown franchises,
1998 and what was known as of 2001. In and the effect of the government’s efforts
a similar study, Lafontaine and Oxley to promote franchising. Chiou, Hsieh,
(2000) found that the majority of U.S. and Yang (2004) examined franchisee
and Canadian franchisors employed the satisfaction and the intention to remain
same contract terms in Mexico as in their in the franchise system in Taiwan. Chan
home market. Their study reported the and Justis (1995) looked at franchising in
operations of more than 200 U.S. and Indonesia by investigating the climate for
Canadian franchisors in Mexico. franchising and the perceptions of the
Josias and McIntyre (1995) published Indonesian people toward franchising.
the first article examining franchising in English and Xau (1994) explored fran-
Brazil. McIntyre (2001) gave us an chising in China by reporting on the
update on what is now the third largest entrance into and subsequent experi-
franchising market in the world. Only ences of two U.S.-based franchises in that
the United States and Canada have country: Kentucky Fried Chicken (KFC)
more franchises than Brazil. The author and McDonald’s. Although recent rela-
covers the history of franchising in tions between the United States and
Brazil, describing what is unique about China have been anything but warm, the
Brazilian franchising, and giving her Chinese still love the retail franchising
view of the country’s prospects for the concept. In April 2001, when a U.S. sur-
future franchise market. McIntyre views veillance plane went down on Chinese
Brazilian franchising as ripe for develop- soil, there was still a block-long line on
ment, evidenced by the size of the a rainy evening to dine at Pizza Hut.
domestic franchise industry, demograph- There are 326 McDonald’s, as well as
ics of the population, and current eco- several Starbucks Coffee, Kenny Rogers
nomic conditions. Roasters, Pizza Hut, and KFC franchises,
among others, that were showing no sign
Asia of slow sales (Friess 2001). Not unlike
Researchers began publishing articles Russia, China also changed markedly in
on franchising in Asia during 1995. the last number of years, and the condi-
McCosker (1996) reported on a survey of tions vary by industry. Alon, Toncar, and
foreign franchises that desired to enter Lu (2002) and Alon and Bian (2005) pro-
into the Asian markets of Singapore, vided a review of the restaurant and pro-
Malaysia, Hong Kong, and Indonesia. He fessional services, respectively.
gathered information from the existing
literature as well as franchisors that had Other Areas
already entered these markets and inter- Franchising around the globe has
views during visits to those countries. been explored in a number of other
Chan et al. (1994) published an article emerging market countries, including
that reported on a survey that identified India (Paswan and Dant 1995), Kuwait

WELSH, ALON, AND FALBE 143


(Welsh, Raven, and Al-Bisher 1996), and increased competition. Many of the
South Africa (Scholtz 1997, 1996). industries in which franchising prevails
Paswan and Dant (1995) published an are mature and offer little economic
exploratory study of franchising in India profits in developed markets. Such indus-
that looked at the definition of franchis- tries include fast food, retailing, hotel
ing and its meaning in the U.S. markets and motels, and other service-based
as compared to the Indian markets. The businesses.
authors also included a framework for Meanwhile, emerging markets are un-
understanding the franchise industry saturated and poised for growth, and
internationally. Kuwait is explored from the consumers in these countries have a
the case-study perspective of a Mercedes pent-up demand for products and ser-
Benz retail franchise dealing with a vices embodying international standards
shoplifter of spare parts (Welsh, Raven, for quality. Franchising allows local
and Al-Bisher 1996). Scholtz in his 1996 entrepreneurs to own and operate
and subsequent 1997 articles, described outlets that belong to multinational com-
the state and penetration of franchising panies and that have well-known brand
as a form of business in South Africa. He names. Kodak Express outlets in China
included an overview of the environment are a case in point. These outlets, owned
for franchising, the population, and the and operated by Chinese entrepreneurs,
legal regulations concerning franchising. distribute a variety of image-based inter-
In 1997, he reported that there were 170 nationally known products to local con-
franchise systems and 6,000 outlets oper- sumers in 50 cities around China. There
ating in the country and that the market are currently more than 5,000 such
was ripe for more entry of international outlets operating in China alone (Alon
retail franchises. 2001).

Conclusion Future Research


We have summarized and explained We hope this furthers the discussion
the current state of research in the area of franchising in emerging markets, and
of emerging franchise markets world- leads to a more comprehensive develop-
wide. We accomplished this by dis- ment of the international field of retail
cussing the nature and scope of franchising. In particular, theory devel-
emerging markets, then summarizing the opment as well as thorough empirical
research both from a theoretical and research need to be conducted on all
practical development perspective as aspects of franchising in emerging
well as by specific franchise studies by markets. Consideration should be given
regions of the world. In doing so, we to the role of government in the fran-
hope to have raised the level of under- chise relationship. How this varies from
standing among franchisors, franchi- country to country and region to region
sees, franchise associations, consultants, needs to be examined, as well as the
and academics concerning franchising climate toward the host country fran-
around the globe. To our knowledge, chise and the culture of the country and
this is the first attempt at summarizing region.
the research on a global basis, from Future research should also concen-
both practitioner as well as academic trate on the role of information technol-
viewpoints. ogy in franchising globally and the
Emerging markets are becoming positive and negative aspects of the
more important as opportunities for information age in franchising. For
retail franchising in the United States example, the Internet is a great way to
because of market saturation and disseminate training information world-

144 JOURNAL OF SMALL BUSINESS MANAGEMENT


wide but may also have the negative proceedings of the International
effect of no personal contact for the Society of Franchising, Minneapolis,
exchange of vital information between MN: University of St. Thomas Institute
the franchisee and the franchisor, such as for Franchise Management, February.
cultural norms and behaviors that are ——— (2004). “Global Franchising and
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franchising, and so on, little research is Eds. D. H. B. Welsh and I. Alon.
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