FRANCHISING AS A

SOURCE OF
TECHNOLOGY-TRANSFER
TO DEVELOPING
ECONOMIES

Professor John Stanworth

Stuart Price
Christine Porter
Tony Swabe
& Dr. Michael Gold

INTERNATIONAL FRANCHISE RESEARCH CENTRE

SPECIAL STUDIES SERIES NO.7

JUNE 1995

PUBLISHED BY UNIVERSITY OF WESTMINSTER PRESS

ISBN 1 85919 051 0
THE INTERNATIONAL FRANCHISE International Journal (MCB University
Press). Additionally, Franchise Growth And
RESEARCH CENTRE (IFRC) 1993-2007
Failure In The U.S. And The U.K.: A
University of Westminster, London, UK.
Troubled Dreamworld Revisited received the
Best International Paper Award in 1997,
"The International Franchise Research
again from the Society of Franchising. This
Centre (IFRC) is committed to
paper was later published in Franchising
improving the understanding of
Research: An International Journal.
franchising. This is achieved by the
publication of impartial research and
Close links were fostered with universities in
by the encouragement of informed
Rome and Pisa (Italy), Haute Alsace
debate."
(France) and Boston, Minneapolis and
Texas (USA), with a view to research
Franchising operates in a dynamic environ-
collaboration. Professor Pat Kaufmann of
ment, with new issues and challenges
Atlanta, Georgia, addressed our inaugural
emerging, including: globalisation, coping
annual strategy seminar, in 1994. Overseas
with competition, disclosure, industry
speakers in subsequent years included
regulation, managing relations with
Cheryl Babcock, Director of the Franchising
franchisee associations, franchisee
Institute, University of St. Thomas,
recruitment & market saturation.
Minneapolis (1995), Professor Rajiv Dant,
University of Boston (1996), Professor
Against this backdrop, the IFRC was
Francine Lafontaine, University of Michigan
established in 1993 by Professor John
(1997), Professor Claude Nègre, University
Stanworth (Director of the Future of Work
of Haute Alsace (1997), Colin McCosker,
Research Group at the University of
University of Southern Queensland (1998),
Westminster), supported by Brian Smith (ex-
Professor Frank Hoy, University of Texas at
BFA Chairman, franchisee, franchisor and
El Paso (1998), Professor Jack Nevin,
author), and Chair of its Steering Group.
University of Wisconsin-Madison (1999),
Professor Tom Wotruba, San Diego State
FOUNDER MEMBERS
University (1999), Professor Bruce Walker,
University of Missouri, (2000), and,
Founder members and sponsors included:
Professor Wilke English, University of Mary
Barclays Bank, the British Franchise
Hardin-Baylor (2000).
Association (BFA), Dyno-Rod, Franchise
Development Services Ltd., Lloyds Bank
IFRC members were active supporters of the
(now Lloyds Group), Mail Boxes Etc.,
International Society of Franchising, and
Midland Bank (now HSBC), Prontaprint,
hosted the ISoF 2005 conference in London.
Rosemary Conley Diet & Fitness Clubs,
Royal Bank of Scotland, The Swinton Group,
The IFRC ceased its research activities in
and Wragge & Co.
2007, when John Stanworth took retirement.
PUBLICATIONS
Web versions of IFRC Special Studies
Series Papers 1993-2001 (listed overleaf)
Their support enabled the IFRC to publish a
number of reports, including its Special
Many of the earlier papers have been re-set,
Studies Series Papers, journal articles,
to allow a successful conversion to Acrobat,
book chapters and conference papers.
and are now available online.
Two IFRC papers received three awards
John Stanworth, Emeritus Professor,
over a period of 12 months (1996-97). The
University of Westminster
first being Business Format Franchising:
http://www.westminster.ac.uk/schools/
Innovation & Creativity or Replication &
business
Conformity ?, which received the Best
International Paper Award in 1996, from the
David Purdy, Visiting Fellow,
Society of Franchising. This paper also
Kingston University
received the Outstanding Paper of 1996
http://business.kingston.ac.uk/sbrc
award from Franchising Research: An
December 2010

International Franchise Research Centre Special Studies Series Papers 1-16 Web Versions 2010 p.1
LIABILITY DISCLAIMER
The information and analysis in each report
is offered in good faith. However, neither the
publishers, the project sponsors, nor the
author/s, accept any liability for losses or
damages which could arise for those who
choose to act upon the information or
analysis contained herein.
IFRC Special Studies Papers 1993-2001
10 London: A Capital City For Franchisee
Recruitment, (Mills, Stanworth &
Purdy), 1997
11 The Effectiveness of Franchise
Exhibitions in the United Kingdom,
(Chapman, Mills & Stanworth), 1997
12 Franchising: Breaking Into European
Union Markets, (Stirland, Stanworth,
Purdy & Brodie), 1998

Web versions published online December 13 Succeeding As A Franchisor,

2010, via http://www.scribd.com/:
1 The Blenheim/University of
Westminster Franchise Survey:
Spring 1993, (Stanworth & Purdy),
1993
2 Improving Small Business Survival
Rates via Franchising: The Role of the
Banks in Europe, (Stanworth & Stern),
1993
3 Targeting Potential Franchisees:
Industry Sector Backgrounds and
Declared Areas of Interest, (Purdy &
Stanworth), 1994
(Stanworth & Purdy, published jointly
with Business Link London Central),
1998
14 Direct Selling: Its Location in a
Franchise Typology, (Brodie &
Stanworth), 1999
15 Unravelling the Evidence on
Franchise System Survivability,
(Stanworth, Purdy, English &
Willems), 1999
16 Survey: Professional Services For
Franchising In The U.K., (Stanworth &
Purdy), 2001

4 The Impact of Franchising on the

Development Prospects of Small &
Medium-sized Enterprises (SMEs) in
Europe, (Stanworth & Purdy), 1994

5 The Blenheim/University of
Westminster Franchise Survey: A
Comparison of UK and US Data,
(Stanworth, Kaufmann & Purdy), 1995

6 Developing a Diagnostic
Questionnaire as an Aid to Franchisee
Selection, (Stanworth), 1995

7 Franchising as a Source of
Technology-transfer to Developing
Economies, (Stanworth, Price, Porter,
Swabe & Gold), 1995

8 Aspects of Franchisee Recruitment,

(Macmillan), 1996

9 Business Format Franchising:

Innovation & Creativity or Replication
& Conformity ?, (Stanworth, Price,
Purdy, Zafiris & Gandolfo), 1996

International Franchise Research Centre Special Studies Series Papers 1-16 Web Versions 2010 p.2
INTRODUCTION
To date, there has been relatively little
analysis of the impact and potential of
franchising in developing countries. However,
in contrast to the dearth of academic and
research analysis, the period between the
early 1970s and the mid-1990s witnessed a
dramatic increase in international franchising
activity. This has embraced not only Western
Europe but also Asia, South and Central
America, Eastern Europe and, to a more
modest extent, Africa. In this article, we shall
look at some of the benefits and
consequences of importing Western
(essentially American) franchises into
developing economies.
DEFINITION OF FRANCHISING
Franchise operations are a hybrid form of
economic organisation, situated between
hierarchical and market types. Part of the
precise definitional debate has revolved
around the disparate business activities which
franchising encompasses. The term has, for
example, been employed to label business
relationships as diverse as the right to
broadcast television programmes within
certain territories to utilising a complete
handed-down franchise business package.
However, a franchise is probably best defined
as comprising a contractual relationship
between a franchisee (usually taking the form
of a small business) and a franchisor (usually
a larger business) in which the former agrees
to produce or market a product or service in
accordance with an overall 'blueprint' devised
by the franchisor. The relationship is a
continuing one with the franchisor providing
general advice and support, research and
development and help with marketing and
advertising. In return, the franchisee usually
pays an initial franchise fee and also an
ongoing royalty or management service fee,
normally based on the level of turnover and/or
a mark-up on supplies purchased from the
franchisor. The franchisee provides the capital
for the outlet and is a legally separate entity to
the franchisor (Curran & Stanworth, 1983).
Though the franchisor is usually a 'larger'
business than the franchisee, in only a handful
of cases does the franchisor truly meet the
International Franchise Research Centre - Special Studies Series Paper No.7
description of 'large'. Most franchisors in
America and Europe remain very much small
and medium-sized enterprises (SMEs) with no
more than a small handful truly qualifying as
large. The latter are almost invariably
American in origin, e.g., McDonald's,
ServiceMaster, Coke, Pepsi, Holiday Inn,
Burger King, Kentucky Fried Chicken, Pizza
Hut, Budget Rent-a-Car, Avis.
At one extreme, it has been argued that the
franchised enterprise is, in reality, simply a
managed outlet featuring in the larger
marketing pattern of another truly
independent business - that of the franchisor.
At the other extreme, the franchised small
business may be viewed as an emerging form
of independent small business whose
distinguishing characteristic is its overt and
close relationship with another, usually larger,
enterprise.
This association might be seen as being little
different, except in degree and the explicit
form it takes, to that now found between many
small businesses and other firms with whom
they do business. In an age of increasing
economic interdependence, such a close
association may simply be seen as a
reflection of the fact that 'no firm is an island
entire of itself'. As such, franchising can be
viewed as a means of nurturing and
developing entrepreneurial talent.
The independence of the small firm can never
be absolute and is often difficult to accurately
assess in practice. Any small enterprise,
whatever its form, is part of a wider network of
economic interaction summed up in the
economist's notion of 'the market' and,
arguably, it is from this source that the main
limitations on independence are derived.
Whilst economically, franchise relationships
may appear to render franchisees highly
dependent at a contractual level, at an
operational level, higher levels of
independence may manifest themselves than
appear at first sight likely.
SATELLITE SMALL BUSINESSES
Small firms may be categorised in terms of
their relationships with the type of market they
supply (Bolton, 1971: 31-32) and their reliance
upon large firms. 'Marketeers', for instance,
1
are those firms which actually compete in the
same or similar markets as large firms
(examples are computer software companies,
fashion merchandise manufacturers and
restaurants). 'Specialists', on the other hand,
are those firms which carry out functions that
large firms do not find it economic to perform.
These may include large firms amongst their
customers (examples are repair and
maintenance in the building industry, jobbing
engineering and specialised retail outlets such
as bookshops).
Finally, and crucially from the viewpoint of the
current discussion concerning franchising, are
small firms performing the role of 'Satellites'
to large firms. Here the small firm is highly
dependent upon a single larger business for
the majority of its trade. The degree of
dependence may be even greater if the large
customer actually designs the product or
service and merely sub-contracts its
manufacture or supply, as appears the case
with a franchise.
PRODUCT AND BUSINESS FORMAT FRANCHISES
'Product' franchises, embrace the fields of car
and petroleum distribution, the soft drink
bottlers (Coke, Pepsi, Seven-Up, etc.) and, in
the United Kingdom, tenanted public houses
(drinking bars). These are often categorised
as 'first generation' franchises and are almost
totally side-lined from mainstream debates on
modern franchising.
'Business format franchises', which have
accounted for a great deal of franchise
industry growth in recent years, involve a full
business system, close on-going franchisor-
franchisee relationships and are more service
oriented, embracing such areas as fast-food,
fast printing, cleaning, hygiene, rental,
employment and health services, etc.
Business format franchisees are typically
SMEs. However, given that the franchisor
levies a royalty-based charge on the
franchisee's level of turnover rather than
profit, pressures to achieve market
penetration and growth are institutionalised
rather than optional. This can be achieved
either by expansion within a given franchise
outlet or, alternatively, by expansion of the
overall population of outlets - often involving
multiple outlet ownership by more successful
International Franchise Research Centre - Special Studies Series Paper No.7
franchisees. Multiple outlet ownership is
particularly common in the field of fast food
franchising where, in the U.S., it is not
uncommon for 50 per cent of a franchise
company's outlets to be owned by less than
20 per cent (and sometimes less than 10 per
cent) of its franchisees. A single large
franchisee may own several hundred outlets
(Bradach, J., 1994). Multiple ownership in
other sectors appears less common.
FRANCHISING AS A MEANS OF IMPORTING
ENTREPRENEURIAL ACTIVITY INTO DEVELOPING
COUNTRIES
To date, franchising has been developed to a
greater extent in the United States of America
than elsewhere, despite the fact that the
concept had its early origins in Europe. The
last 15 years, however, have witnessed an
unprecedented spread of franchising across
national frontiers, prompted almost
exclusively by American franchise companies
wishing to cope with problems of market
saturation and monopoly legislation at home.
Exports by European franchise companies, by
way of comparison, range from modest to
trivial depending upon the country in question.
Countries, such as France, are becoming
involved in international franchising activity,
but appear to be currently concentrating on
ex-colonies and are geared towards serving
expatriates.
Franchisor internationalisation began initially
by establishing a presence across
industrialised nations with developed
economies and language/cultural proximity
and affinity to the USA. As markets began to
become saturated in America, and as the
'export' potential of franchising became more
evident, the growth rate accelerated and the
global net has broadened. By the end of the
1980s, around 400 American business format
franchisors operated over 37,000 foreign
outlets covering most major countries of the
world (Acheson, 1991:69). Looking at the icon
of U.S. business format franchising - the
fast-food/restaurant industry - the number of
outlets 'exported' to other countries rose from
2,169 establishments in 1974 to 8,485 in 1989
(Horwath International, 1991).
In an increasing number of countries,
increasing urbanisation, rising disposable
2
incomes and expanding consumer markets
provide conditions favourable to the growth of
franchising. There are a number of ways in
which international markets can be
penetrated:
"...franchising directly to individuals,
company-owned operations, joint
ventures or master franchisors. Many
franchisors use more than one method
in conducting foreign operations but the
most popular, cheapest and fastest
method is the master license
technique" (U.S. Department of
Commerce, 1988)
Under the 'master licence' technique, a
master licensee receives the right to develop
the franchisor's system in a specific country or
region. The U.S. Department of Commerce
claims that:
"Compared to other service sectors,
the problems of franchise companies in
accomplishing international
transactions are relatively less
formidable" (U.S. Department of
Commerce, 1986)
Walker (1989: 13), examined reasons given
by American companies in identifying a
country to receive their first venture in global
(non-U.S.) expansion. Perhaps surprisingly,
the reasons given did not reflect the degree of
proactive planning that might have been
expected. For instance, 44.0 per cent had
simply responded to a first/only contact from
a foreign 'prospect'. After that came,
'proximity to the USA' (27.6 per cent) and
'similarities to the U.S./English language' with
18.0 per cent combined.
Approaching fifteen per cent of U.S.
franchised outlets are now located in LDCs
('Lesser Developed Countries'). Thus, it
appears that franchise companies will
continue to move into developing countries
when opportunities arise, either on their own
initiative or in response to approaches from
the countries concerned. Developing
countries, in turn, must decide whether the
'know-how' and role model advantages gained
by the import of, usually U.S., franchise
systems outweighs possible disadvantages
resulting from the displacement of existing
International Franchise Research Centre - Special Studies Series Paper No.7
indigenous businesses and capital outflows in
the form of repatriated profits.
U.S. ATTITUDES TOWARDS FRANCHISE
GLOBALISATION
High profile American involvement in
international franchising is one which wins
favour at the highest levels in the U.S. with
strong benefits to the U.S. economy. These
have been summarised in a recent analysis by
American writer Eroglu (1992: 19):
"...from a balance-of-payments
perspective, international franchising is
considered (in the U.S.) as a safe and
speedy means of obtaining foreign
currency with a relatively small financial
investment abroad. It is notable in that
it neither replaces (American) exports
nor exports (American) jobs, all these
reasons making this business
arrangement one of the most preferred
and government-supported forms of
international involvement." (emphases
in brackets added)
The advantages of global franchising to
franchisors may be summarised as:
■ Fewer financial resources required as
franchisees incur the majority of the costs
involved;
■ Raw materials can often be produced
internally in countries where direct imports
are limited;
■ Less susceptibility to political, economic
and cultural risks if ownership is local -
property is less likely to be expropriated
since franchisees are local nationals;
■ Franchisees are more familiar with local
laws, language, culture, business norms
and practices of the satellite country.
However, the risks of employing franchising
as a vehicle to international expansion are,
from the franchisor's viewpoint:
■ Possible difficulties in repatriating royalties;
3
 Fig 1 - Problems Encountered by U.S. Firms
Establishing Franchises in Foreign Countries
Proportion
of Sample
Government or legal restrictions.......................................................... 59.6%
Difficulties in recruiting enough qualified franchisees ........................... 44.2%
Lack of sufficient local funding............................................................. 36.5%
Difficulty of controlling franchisees....................................................... 36.5%
Difficulty of redesigning the franchise package to make it saleable to 28.8%
franchisees in foreign markets
Trademarks and/or copyright obstacles ............................................... 28.8%

■ Difficulties in protecting copyright and An implicit feature of a franchise system is the

intellectual property; concept of technological transfer and the
'learning organisation', where technology
■ Difficulty in policing quality standards; refers to skills and know-how rather than just
machinery and hardware. This broader
■ Unfamiliar laws, regulations, language and process relates to methods of organisation
business norms; and operation, quality control, and various
other manufacturing procedures.
■ Difficulties in servicing franchisees;
Dahlman & Westphal (1983) identify three
■ Local laws may create difficulties in levels of technology transfer, which it is
terminating contracts; possible to align to a context of franchise
systems:
■ Creation of local competition as the
franchise concept is mimicked. Level 1 Operating Capability - the
capability required to operate a
technology, for example, to run and
A study on the problems experienced by U.S. maintain a business unit (such as a
firms in establishing franchises in foreign quick service restaurant).
countries identified several major factors (see
Figure 1 - Ashman, 1987). Level 2 Investment Capability - that
required to create new productive
TECHNOLOGY TRANSFER capacity (or new restaurants).

The transfer of franchise know-how across
national boundaries can be viewed as a
process providing local franchisees with
access to value-added businesses as well as
the marketing techniques and managerial
support implicit to firms developed in industri-
alised economies. Here, the strength of the
franchisor's home base plays an important
role in conferring competitive advantages to
the franchisee and economic development
opportunities to the satellite country.
Level 3 Innovative Capability - the ability
to modify and improve methods and
products.
Whilst all of these levels require different
types of skills and support from the franchisor,
there is typically a gap between the
technological capabilities and infrastructure
support of firms operating in the home base
and those in other countries.

International Franchise Research Centre - Special Studies Series Paper No.7 4

It is within the franchisor's home base that the
infrastructure, such as bank support (Stern &
Stanworth, 1994), suppliers and main
customers, are most sophisticated and
contribute to the rate of diffusion of a
particular technology. Sagafi-nejad & Belfield
(1980) conclude that there is a positive
correlation between levels of economic
development and rate of know-how diffusion.
With reference to fast food franchises, Yavas
& Vardiabasis (1987) established that a
positive relationship existed between U.S.
franchisor presence and the satellite
countries' gross domestic product, levels of
urbanisation, population levels, female
participation in the workforce and proportion
of population aged under the age of 20.
The establishment of a local supplier base
means that technological transfers concerning
operating capability focus on the day-to-day
challenges of maintaining standards,
managing staff and selling products in
accordance with the franchise agreement and
manual. Due to differing levels of develop-
ment and customer requirements within
LDCs, and some industrial countries, the
franchisor may also be required to transfer
training and know-how to local supplier firms
in order that brand/product consistency and
continuity of supply is achieved.
For McDonald's to ensure product consis-
tency, brand credibility and standardisation of
products in Russia, they had to become a
vertically integrated concern (unique in
McDonald's). A food processing plant was
built by Finnish building contractors and the
machinery sourced from the UK and Canada.
Product packaging was, initially, imported but
is now Russian supplied. McDonald's also had
to import potato seeds in order to conform to
standards set in the USA. This raw material
importation has been mirrored on the entry of
Pizza Hut into India. The company imported
Canadian-strain wheat which is more suitable
to make pizza-dough.
Infrastructure development requirements
suggest that the greater the level of
experience differential between the transferor
and transferee, the higher technological
transfer costs will be and the slower the rate
of diffusion of a particular technology. Indeed,
Davidson & McFetridge (1984) argue that the
International Franchise Research Centre - Special Studies Series Paper No.7
extent to which a technology transaction is
likely to be burdened by high costs is
determined by: (a) the newness of the
technology; (b) the extent to which the
technology is a departure from the state of art;
(c) the proximity and number of technological
substitutes; and (d) the amount of previous
technological transfer experience of the
parties involved.
Pine (1992) argues that, within the context of
the international hotel industry, both economic
and social characteristics of the transferor and
transferee countries should be taken into
account when examining technological
transfer. He observes that industrialised
countries generally spend a greater proportion
of GNP on education, provide more tertiary
level places for students and have a much
lower proportion of adult illiteracy in the
population. This enables relatively easier
technology transfer within and between such
countries than is possible with developing
countries. Within Russia and China, for
example, many of McDonald's 'crew-
members' are university graduates,
engineers, doctors and teachers eager to gain
experience of western training and managerial
techniques which may, in turn, be passed on
to other professions. Thus lower educational
standards within LDCs may have a
detrimental effect on attracting international
franchises not only due to cost considerations
but because the ability to attain critical mass
within such countries may be slower than
within developed economies.
This said, some franchise organisations have
become increasingly sophisticated in their
strategies for developing franchisees'
operating ability through the combined use of
class-room and hands-on techniques.
Historically, franchise training was generally
limited to the provision of an operations
manual. Contemporary franchisee training,
however, is generally performed at or more of
the following training facilities: a) at a full-
service training centre; b) at an operational
outlet with a training capability; c) at an
operational outlet run by a certificated
franchisee/trainer. Such training techniques
tend to be more prevalent amongst the larger
franchise organisations and also amongst
those with some history of franchising. This
means that they are able to train franchisees
5
from LDCs through employing a variety of
techniques. For example, McDonald's actually
sent 59 Russian employees for training in
Canada and the USA, four of whom
graduated from the company's 'Hamburger
University' (Price, 1993). As such training
techniques emerge over time, there is a
positive correlation between the age of a
franchisor company and the level of
sophistication of franchise training in LDCs.
As business format franchising focuses upon
the transfer of know-how, at least at level 1
(above), rather than simple product
distribution, it is most likely to have a direct
effect on the economic progress of developing
countries (Kaufmann & Leibenstein, 1988).
Some developing economies are attracted by
the notion of importing entrepreneurship and
managerial sophistication and aiding its
diffusion via equity involvement. For example,
McDonald's of Canada owns 49 per cent of
the Moscow venture, with the remainder held
by Mosbshepit, Moscow council's catering
operator. Operating capability is seen as
generating a pool of knowledge that may then
replicated more generally.
Some Pacific Rim countries, building upon the
early learning experiences resulting from the
importation of U.S. franchise operations, have
added independent investment and innovative
capabilities resulting in the emergence of
home-grown franchising chains. However,
format franchising can often have a lower
priority for LDCs who are keener on the
importation of know-how from advanced
technology firms, rather than franchise
retailers.
As many franchisors are relatively young and
smallish companies, the costs of tech-
nological transfer associated with movement
into LDCs may be perceived as prohibitive.
Inter alia, it may be argued that one of the
reasons for franchisor concentration upon
industrialised nations is the lower costs of
technological transfer resulting from higher
educational standards as well as higher
savings ratios - indicating the potential pres-
ence of finance available for investment in
franchising. However, there may be a
technological transfer cost associated with the
concept of business format franchising itself.
Business format franchising has been actively
International Franchise Research Centre - Special Studies Series Paper No.7
employed as a method of expansion amongst
U.S. retailers since the 1950s. In many coun-
tries, including industrial ones, franchising has
yet to emerge as a business concept of any
significance. For example, when Kentucky
Fried Chicken entered mainland China, they
had to virtually introduce the concept of
franchising from scratch (English & Xau,
1994).
In addition to employing business format
franchising as a form of business growth,
there has also been a tendency for
franchisors to use it as a capital market.
Hence, for smaller franchisors the issue of
repatriation of royalties may have been of
more importance than for larger franchisor
concerns. Although repatriation
considerations may, in turn, be a reflection of
the relative size of franchisors attracted to
LDCs, some franchisors have sought to
differentiate themselves according to the
investment requirement of franchisees. Thus
those franchisors with greater brand capital
have higher economic costs of entry. Inter
alia, this infers that as investment capability is
a form of technological transfer, there may be
some difference between the calibre of
franchises that gravitate towards LDCs versus
those which gravitate towards industrialised
nations.
Such effects may be mitigated by the use of
specific instruments by LDC governments to
facilitate the entry of international franchisors.
Beamish (1985) claims that government
persuasion/legislation has a significant impact
on entry to LDCs compared with developed
countries.
Arguably, it is Level 3 (above) of the
technology transfer process which is the most
difficult to achieve since it requires some
alteration to the marketing mix of the franchise
in order to adapt to local conditions. To some
degree, this is also partially reliant on the
cultural proximity and attractiveness of the
satellite country which, in part, determines the
willingness of the franchisor to accept change.
Possibly one of the additional reasons for U.S.
business format franchisors' gravitation to
developed nations is that they can do so
without substantial alteration to the concept.
The extent to which standardisation may be
realised across marketing mix variables is
6
partially determined by the cultural and
political proximity of the satellite country.
THE INDONESIAN EXAMPLE
A recent examination of the progress of
franchising in Indonesia (Chan & Justis, 1995)
demonstrates a pattern of events now
becoming fairly common in developing
economies. Until the mid-1980's there were
few if any foreign (or indeed home-based)
franchise companies registered in Indonesia.
There were stringent foreign investment laws
and a preference for joint ventures rather than
outright foreign ownership. Even joint
ventures were restricted to sectors specifically
targeted by national government.
Whilst all foreign investment must still receive
official approval, the insistence on joint-
ventures was relaxed in 1992 and replaced by
an agreement that, for sums in excess of
$50m targeted towards certain key regions, a
project may be 100 per cent foreign-owned
with a divestiture of 20 per cent to local
ownership over the next 20 years.
Franchisors still face problems with trademark
protection and find 'imitation' a common
problem. Locals, on the other hand, claim that
franchise fee levels are generally too high and
franchisee support level generally too low.
Chan & Justis (1995) found that imported
franchises were having a useful 'role model'
effect in encouraging local entrepreneurs to
set up their own franchises and even consider
expanding these outside Indonesia. Evidence
is not yet available as to whether these local
franchisors had previously worked as
franchisees in imported Western franchise
companies or not but there are now
approaching 100 different franchise registered
companies, mostly of local origin. These
reside almost totally in service categories
such as restaurants, retail, hair/beauty salons,
real estate and hotels.
THE CHINESE EXAMPLE
Despite low income levels in China and the
sheer size of the Chinese landmass, U.S.
fast-food giants McDonald's and Kentucky
Fried Chicken have recently staged
enormously successful ventures there. Since
International Franchise Research Centre - Special Studies Series Paper No.7
1978, China has moved towards a more
market-based economy (English & Xau,
1994). This has involved the acquisition not
only of modern industrial technology but also
allied managerial and marketing technologies.
This, plus a movement towards conformity
with international codes of protection of
copyrights, trademarks and intellectual
property, has created an environment
favourable to the movement of franchise
companies into China.
Joint ventures have traditionally been a
popular method for development by
franchisors internationally. In this case, the
partner is a state agency. The Chinese
government attains domestic investment
whereas the franchisor receives financial
assistance with the costs of globalisation, plus
a sensitivity towards local cultural, political
and administrative norms and behaviour
patterns.
Local entrepreneurial and managerial talent
tends to be in short supply and expatriate
visas are rationed, thus enforcing the
development of home-grown talent rather
than importing entire, and already trained and
experienced, managerial teams.
THE BRAZILIAN EXAMPLE
Though still viewed as an emerging economy,
Brazil is claimed to have the fifth largest
franchise industry in the world (behind the
U.S., Japan, Canada and France) with
approaching 800 franchise systems (Josias &
McIntyre, 1995). Whilst Western franchises
account for less than 15 per cent of total
franchise brand names in Brazil, they
nonetheless tend to be amongst the strongest
brands with the largest franchise networks.
Home-grown franchises embrace niches as
diverse as ethnic foods, dental clinics and
construction products to cosmetics,
playcentres, language school and car rentals.
Proximity to the U.S. plus cultural assimilation
factors are claimed to have fostered the rapid
growth the franchising in Brazil. Despite
Brazil's position in the world league table of
franchising, current franchise export levels are
estimated to be 'minimal' (Josias & McIntyre,
1995). However, in the longer term, expansion
into North American is seen as a 'natural
7
progression'.
DISCUSSION AND CONCLUSION
We have stressed the importance of
franchising as a form of technological transfer
to developing economies. Some indication
concerning the potential of franchising for
growth and entrepreneurial development in
developing nations has been given. However,
it may well be that, in exchange for exposure
to managerial, marketing and consumer
know-how which imported franchise systems
bring with them, there is a price to pay. The
cultural homogeneity which exposure to
Western tastes brings with it, the loss of
economic diversity, possible displacement of
existing local businesses, the repatriation of
fees and profits, plus the notion of control
from a distance, all need to be taken into
account by policy-makers in developing
economies before deciding to either embrace
or reject this source of technology transfer
and know-how.
A frequent source of potential difference
between franchisor and franchisee in
developing countries concerns quality. In
environments where Western standards of
quality may be considered excessive, and
where a product/service sells well at a lower
and more easily achieved and sustained level
of quality, franchisor's stipulated quality
standards can come under attack. More
seriously, issues such as this tend to highlight
cultural differences and the limited flexibility of
many franchise packages in adapting to local
cultures.
For governments of developing countries who
wish to tap the potential of franchising and
concentrate on promoting local businesses,
whilst resisting the downside factors of
imported franchise retail know-how, the
'wholesaler-retailer' franchise model has
sometimes proved effective. This has
sometimes also served the purpose of
promoting ethnic majority businesses in their
attempts to compete with those of powerful
ethnic minority groups, e.g., Chinese, Indian,
Lebanese, etc. Here, retailers can form a
wholesaling co-operative capable of yielding
economies of scale in purchasing typically
beyond the scope of small traders.
Alternatively, the 'franchisor' and 'franchisee'
International Franchise Research Centre - Special Studies Series Paper No.7
may be separate entities entering into a
voluntary relationship. Here, government
agencies can take on the role of the franchisor
or, alternatively, be instrumental in forming a
body which can.
Whatever posture governments of developing
economies decide to adopt on franchising,
one thing appears fairly certain and that is that
franchising as a business concept cannot be
indefinitely ignored.
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Franchising in the Economy: International Edition,
IFA Educational Foundation Inc./Stoy Hayward
ASHMAN, R.T. (1987)
The Way Ahead for Franchising and Licensing,
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BEAMISH, P.W. (1985)
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BRADACH, J. (1994)
'Chains within Chains: The Role of Multi-Unit
Franchisees', Proceedings of the 8th Conference of
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February
CHAN, P. & JUSTIS, R. (1995)
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CURRAN, J. & STANWORTH, J. (1983)
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DAHLMAN, C. & WESTPHAL, L. (1983)
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DAVIDSON, W.H. & McFETRIDGE, D. (1984)
'International Technology Transactions and the
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ENGLISH, W.D. & XAU, C. (1994)
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EROGLU, S. (1992)
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WALKER, B.J. (1989)
A Comparison of International versus Domestic
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USA
YAVAS, B.F. & VARDIABASIS, D. (1987)
'The determinants of U.S. International franchising:
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Horwath International, (1991)

Franchising in the Economy: International Edition,
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'Franchising in Brazil', The International Challenge -
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KAUFMANN, P.J. & LEIBENSTEIN, H. (1988)

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Franchising in the Economy 1984-86

International Franchise Research Centre - Special Studies Series Paper No.7 9

AUTHORS
John Stanworth is the director of the
International Franchise Research Centre
and has been engaged in research into
franchising since the mid-1970s. He also
leads the Future of Work Research Group,
based at the University of Westminster, which
has a record of specialist research in
Teleworking, Small Business Development
and Human Resource Management. Studies
have been undertaken for many clients,
including The Department of Trade &
Industry, The Department for Education and
The Economic & Social Research Council.
Stuart Price, Christine Porter, Tony Swabe
and Michael Gold are members of the
London Management Centre, University of
Westminster.
International Franchise Research Centre - Special Studies Series Paper No.7
INTERNATIONAL FRANCHISE RESEARCH CENTRE
The International Franchise Research Centre
(I.F.R.C.) is committed to improving the
understanding of franchising. This is achieved
by the publication of impartial research and by
the encouragement of informed debate.
Membership is suitable for anyone with an
interest in franchising and further details are
available from the address on the rear cover.
SPECIAL STUDIES SERIES
Papers in the Special Studies Series are
supplied free of charge to I.F.R.C. members
and are published a minimum of four times a
year. They report upon a range of issues
which are felt to be of interest to the
franchising community. Subject matter
includes the findings of surveys of franchisors,
franchisees, and potential franchisees, and
also special interest matters, such as finance
for franchising.
No.1 The Blenheim/University of
Westminster Franchise Survey:
Spring 1993
No.2 Improving Small Business Survival
Rates via Franchising: The Role of the
Banks in Europe
No.3 Targetting Potential Franchisees:
Industry Sector Backgrounds and
Declared Areas of Interest
No.4 The Impact of Franchising on the
Development Prospects of Small &
Medium-sized Enterprises (SMEs) in
Europe
No.5 The Blenheim/University of
Westminster Franchise Survey: A
Comparison of UK and US Data.
No.6 Developing a Diagnostic Questionnaire
as an Aid to Franchisee Selection
10