What are the social and economic benefits and costs of global franchising?

Abstract

According to a 2004 survey by the International Franchise Association, the positive economic impact of franchising on the U.S. economy is undeniable: • Franchise businesses account for about half of retail sales, and 10% of the US private sector economy • Franchise businesses directly employ over 9.8 million Americans, and generate a total of 18 million jobs (about 10% of the private sector workforce) • Sales of franchised businesses have surpassed $1.5 trillion • One out of 12 businesses is franchised In a recent study of the US franchise sector conducted for the International Franchise Association, Franchise Recruiters Ltd (2003, p.2) concluded that "franchising is a foremost force in the creation of the US entrepreneurial revolution that continues to fuel the lethargic economy, producing new business owners and jobs." Despite the impressive performance of franchising as an organization form in the U.S., internationally franchising has lagged behind and only over the last decade has picked momentum (Welsh and Alon, 2001). Emerging markets have offered a number of advantages to franchisors that include, but are not limited to, an expanding middle class, relatively unsaturated markets, urbanized and highly populated cities, a growing youth market, free trade zones, relatively friendly business laws, liberalized markets and transitioning economies, and a huge pent-up demand for western-style goods and services. Policy makers in merging markets have observed the economic contributions of franchising in the developed markets and are increasingly seeking for ways to both develop and regulate this form of business. While in 1993 at least 24 nations developed trade association specializing in franchising (Preble and Hoffman, 1995), a decade later there are at least 55 national and regional franchise associations globally according to sources in the International Franchise Association. The attractiveness of emerging markets to the franchising sector coupled with the efforts by the host markets to stimulate economic development through franchising has led to the rapid diffusion of franchising globally (Hoffman and Preble, 2001). Franchising is an organizational form primarily used in service industries and a method of transferring a business format via arm's length with minimum financial investment. Table 3.1 depicts the internationalization of U.S.-based franchising. What can be gleaned from the data is that franchisors exist in multiple industries and that these industries vary in terms of the internationalization of their franchising systems and their mode of entry. The data also suggest that most franchisors (63%) in the U.S. are seeking international franchisees. This data were calculated by compiling all the franchisors which appeared in Entrepreneur Magazine (a total of 640) by industry and counting those who indicated that they are interested in expanding overseas via franchising. In recent years, expansion into emerging markets in Latin America, Eastern and Central Europe, and East Asia has accounted for much of the international expansion of franchising from industrialized world (Welsh and Alon, 2001; Alon and Welsh, 2001). Franchising has been used by emerging markets as a tool for economic development and for global integration. But since franchising in emerging markets is a new emerging phenomena (Alon and Welsh, 2001; Welsh and Alon, 2001), few papers have investigated a wide spectrum of social and economic concerns facing this nascent interaction. Therefore, the purpose of this chapter is to better understand the influence of franchising on development and transitioning in developing economies, discussing both the economic and social implications of the franchising mode of entry to low income countries. The rest of the paper is organized as follows: next, the link between globalization and franchising is established, setting the framework for the body of the paper which analyzes the economic and the social franchising environments. The chapter concludes with summary discussions and an agenda for future research. © 2006 Springer Science+Business Media, Inc.