Final Term Paper

BUSN-3500-053:

INTERNATIONAL BUSINESS ENTRY STRATEGY

The Strategy of Entry of Franchise Networks from the EU

into the Ukraine’s Market

PROFESSOR BRUNO GOMES

AAKASH TANWAR

300298449

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 TABLE OF CONTENTS

Serial No. Title Page No.

1 Introduction 3
2 Franchising 3
3 Ukraine’s Economy 4
4 Article Summary 5
5 Analysis 6
6 Conclusion 8
7 References 9
8 Appendix-I 10

Introduction:

Franchising is arguably one of the most common business entry strategy out there. A huge

number of firms, providing a large variety of products and services, have successfully employed

this business entry strategy to open new markets, expand business, and obtain competitive

advantages. Wherever we go, we see an obvious influx of franchises in the business spaces. I

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wanted to explore the impact that this investment-based entry strategy can have on a country’s

economic wellbeing. That’s what motivated me to further explore this topic. Further, I’ve been

keen to understand the business scenario in eastern Europe. Eastern Europe is unique in the

context that its markets are making a transition from a communism-based planned economy to a

capitalism-based free market economy. My research led me a research article written by

Solomiya Ohinok that explores the “strategy of entry of franchise networks from the EU into the

Ukraine’s Market”. Ukraine being the biggest transitioning free-market economy in eastern

Europe ignited my interest.

In this paper, we’ll first introduce the franchising business entry strategy. After that, we’ll

understand the current economic condition of Ukraine. Next, we’ll summarize the article,

provide an in-depth analysis, and draw relevant conclusions.

Franchising: “Franchising involves selling the rights to a complete package of trademarks,

processes, technologies, designs and copyrights in order to operate a specific business” (FITT).

The purchaser of the franchise, often referred as the franchisee, pays the franchise holder

(franchisor) a one-time fee to purchase the franchise and this may be followed by an annual

percentage of sales. The franchisor in return contributes “process technology, a business name or

reputation, equipment and support to the business venture” (FITT). The business strategy has its

advantages and disadvantages. The primary ones are mentioned below:

Advantages: Franchising is a cost effective and low-risk business entry strategy into new

markets. Further, rapid business expansion, geographically, is possible with franchising. Finally,

the franchisees possess knowledge of local taste and culture. This insight can help the business

based on franchise model achieve success.

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Disadvantages: Managing franchise is challenging, especially if we’re dealing with many

franchises located across several countries. Further, franchise model can restrict a franchisee’s

independence when it comes to decision making. This is especially true when it comes to making

strategic or tactical business decisions. Further, it may be the case that the franchisee’s are

obligated to promote other products made by the franchisor.

Ukraine’s Economy: Ukraine, as we know, was a part of USSR. After the dissolution of

Soviet Union in 1991, Ukraine’s GDP rapidly fell for the next ten years. The economy recovered

from there and the GDP, despite some ups and downs, was USD 150 billion in 2019 (imf.org,

2020). The inflation rate, in 2019, was 8.73%, remaining a matter of concern (imf.org, 2020).

The GDP in 2020 was estimated to grow at a rate of 3.7% (worldbank.org, 2020). However,

because of COVID19 outbreak, this number may be significantly smaller or even negative. In

2017, service sector accounted for nearly 60% of the country’s GDP, followed by industry

(28.6%) and agriculture (12.2%) (cia.gov, 2020). Primary exports include: “ferrous and

nonferrous metals, fuel and petroleum products, chemicals, machinery and transport equipment,

foodstuffs” (cia.gov, 2020). Russia is the country’s largest trading partner, accounting for 9.2%

of exports and 14.5% of imports.

Article Summary: Globalization has bought economies of all countries closer. Many

countries have joined hands to establish free trade zones and/ or economic unions. European

Union is one of the biggest economic unions across the world. Franchising plays a significant

role in developing trade relations between countries. The author describes franchising as “one of

the most effective and democratic ways of transcending national markets.” (Ohinok, 2016).

Although the franchise business model is most prevalent in North America, it has made

significant inroads into Western Europe, and it is gaining significant foothold in Eastern Europe

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too. Figure 1 (Appendix) depicts the growth rate of franchise in EU member countries in 2014.

The article begins by discussing how franchise business model has been increasing in Poland in

the last decade. Poland is discussed in detail because many of the franchises that operate

successfully in Ukraine have their roots in Poland. Becoming an EU member, it has been noted,

helps expand sales network as it provides access to other large and small European markets.

The author believes that presence of international franchises in the Ukraine will help the

Ukrainian enterprises gain experience of managing franchising relations and “create pre-

conditions for broader development of a contracting system of internal franchising in Ukraine”

(Ohinok, 2016). Over the years, the number of franchises and the number of outlets in Poland

have been increasing. Poland based companies account for some of the leading franchises in

Central and Eastern Europe. “Polish entrepreneurs as a secure business-idea which once again

underlines the practical benefits of this business doing strategy and expansion of distribution

networks.” (Ohinok, 2016). The author further conducted statistical analysis and discovered a

direct correlation between increase in franchise outlets and GDP growth. In fact, “increase in the

number of franchise outlets by a thousand leads to the GDP growth by 0.004525 million of US

dollars.” (Ohinok, 2016).

What makes the success of Polish franchises in Ukraine remarkable is that these franchises have

been successful despite Ukraine’s inadequate legal framework, unpredictable economy, shortage

of start-up capital, and lack of experience of entering a franchise form of partnership. There were

about 24 polish franchise networks operating in the Ukraine as of 2012. The European franchise

networks command a 24% market share in the Ukraine’s franchise market.

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The author concludes by stating that the future of Ukraine in European markets will depend on

the country’s ability to internationalize and to attract advanced technological know-how. Since

Ukraine doesn’t currently have the conditions that would result in high degree of innovation,

franchising becomes even more important, for it forms the basis for financing technology

dependent activities.

Analysis: From the article, it is clear that Ukraine’s economy is far from realizing its

potential. Political uncertainties, war, and corruption in bureaucracy are some of the factors that

have hindered the economic growth of the nation. It is also evident that lack of innovation has

been one of the factors hampering the economic growth of Ukraine. In light of all this,

franchising seems to be an attractive market entry strategy to boost business and expand

economy, while keeping the risks within an acceptable limit. Many experts, including the author

of this article, agree that franchising leads to increase in economic activity that in turn leads to

GDP growth in a country. Based on a survey sample, it was discovered that “two million

franchised businesses sustain more than 19 million jobs around the world. Further, on average,

franchising contributes just over four percent to national GDPs.” (Wiseman, 2015). Further,

today, there is an increased acceptability of foreign franchises globally and people are more open

to various concepts. “The penetration rate for non-domestic brands can be has high as 80

percent and more. For example, in Indonesia, 81 percent of franchise concepts have foreign

franchisors, and in Croatia that number is 88 percent.” (Wiseman, 2015).

It can be said that an influx of EU based franchises in Ukraine will lead to job creation and boost

the economy. The franchisors will bring with themselves advanced technologies and processes

that are crucial for economic development. Furthermore, these franchises may serve as a

stimulant for the local entrepreneurs who may apply the knowledge garnered from the franchise

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partnerships to launch ventures of their own or improve other businesses. Care however must be

taken to not violate any terms of the franchise contract, including non-disclosure of processes/

technologies that give the franchisors their competitive advantage.

The government will have to play a deciding role in providing better external environment

conditions for businesses if Ukraine’s economy were to turn for the better. Firstly, it must strive

to eliminate lethargy and corruption in bureaucracy. This will ensure that business operations run

smoothly, and it is easier to take up new business ventures. The government must also take the

necessary steps to become a member of European union. This will allow the domestic industries,

including the franchisors, to expand into new markets, Boosting the country’s GNP. However,

becoming the member of EU would mean companies based in other member EU states have

unrestricted access to Ukraine’s market. This may prove disastrous for the local industries,

including franchises, if they are not competent enough. Thus, it is crucial that the government

promotes a spirit of innovation and entrepreneurship to ensure that the domestic industries are

battle ready when the market finally becomes a part of the EU.

Although the article fairly explains the importance of franchises for the economic growth of

Ukraine, it does little effort to compare other market entry strategies to franchising. This

comparison would have made a stronger case for the franchises if it were proven that other

market entry modes will not be as effective, owing to the country’s existing business

environment conditions. The article also seems to be suggesting that Ukraine should mimic

Poland’s franchise-based business expansion model to stimulate the economy. The author seems

to assume that since Poland and Ukraine are neighboring countries, the factor conditions for

business would be identical. This may however not be the case. Take for instance India and

Pakistan. Although these two countries are neighbors, India has a booming economy whereas

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Pakistan is struggling to keep its economy afloat. If it was suggested that the factor conditions of

Ukraine and Poland are similar, or Ukraine is where Poland was in the past (economic conditions

wise) a sounder argument could’ve been made.

Conclusions: Undoubtedly, the influx of franchises from EU to Ukraine will be beneficial for

the latter. Not only will it boost the economy, but it also will help reduce the unemployment rate,

something the Ukrainian economy has been struggling with. The stimulated economy may lead

to an increase in innovation in the country and help it further strengthen its economy.

Government must however work hard to ensure that the environment is well suited to help

businesses prosper. This will in turn attract more businesses in the country. There must also be

legislations in place to ensure that the franchisors’ business secrets are well protected. Whether

Ukraine can imitate Poland in successful implementation of franchise-based business model

depends on how similar the factor conditions are in the two countries. If they’re not, a

comparative study must be done in order to establish the best market entry strategy in Ukraine,

relative to the current business environment.

References

 Main Article: Ohinok, S. (2016). The Strategy of Entry of Franchise Networks from the
EU into the Ukraine’s Market. Handel Wewnêtrzny, 3, 228–238. Retrieved from:
https://0-web-b-ebscohost-com.orca.douglascollege.ca/ehost/pdfviewer/pdfviewer?
vid=9&sid=e8c5bc67-6c73-4022-a423-d4a6b2dd7e51%40pdc-v-sessmgr04

 International Monetary Fund (2020). Report for Selected Countries and Subjects.
Retrieved from:
https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/weorept.aspx?
pr.x=48&pr.y=7&sy=2017&ey=2021&scsm=1&ssd=1&sort=country&ds=.&br=1&c=92
6&s=NGDPD%2CPPPGDP%2CNGDPDPC%2CPPPPC%2CPCPIPCH&grp=0&a=

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 World Bank (2020). Global Economic Prospects. Retrieved from:
https://openknowledge.worldbank.org/bitstream/handle/10986/33044/9781464814693.pd
f

 Oec.world (2020). Country Profile: Ukraine. Retrieved from:

https://oec.world/en/profile/country/ukr/

 Central Intelligence Agency (2020). World Factbook: Ukraine. Retrieved from:

https://www.cia.gov/library/publications/resources/the-world-factbook/geos/up.html

 WISEMAN, E., & SCHWARZER, P. (2015). Franchising: A Global Engine for

Economic Growth. Franchising World, 47(6), 15–18. . Retrieved from: https://0-search-
ebscohost-com.orca.douglascollege.ca/login.aspx?
direct=true&db=bsu&AN=103584481&site=ehost-live&scope=site.

Appendix I

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Figure 1. Source: https://0-web-b-ebscohost-com.orca.douglascollege.ca/ehost/pdfviewer/pdfviewer?vid=9&sid=e8c5bc67-6c73-4022-a423-

d4a6b2dd7e51%40pdc-v-sessmgr04

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