Franchise Entrepreneurs
The World is their Oyster

By Dianne H.B. Welsh
Published: August 2007

Thomas Friedman, the award-winning New York Times columnist, in his best selling book, The World is Flat, explains how the flattening of the world happened at the dawn of the 21st century; and what it means to countries, businesses, communities, and individuals; and how governments and societies can, and must, adapt. In a word, the book is about globalization and how it affects the daily life of every person in this room.

However, globalization is not new, as we well know. In 1964 when my father created soft-sided luggage that revolutionized the luggage industry, his main concern was how to produce his luggage in Iowa Falls, Iowa and be competitive with the manufacturers that would soon spring up in Korea and Taiwan. That was 42 years ago. By today’s market indicators, my Dad had good reason for concern. Industrial production expanded 10.9% in South Korea, 6.1% in Thailand, and 2.3% in Chile in the first half of 2006 (The Economist, August 3, 2006). Meanwhile, Europe’s economies are improving: Germany’s industrial production surged 7.6%, Sweden’s output increased by 6.8%, and France’s production is 2.6% higher in February 2007 than it was in the same period in 2006 (The Economist, April 12, 2007).

Franchising is a business model that has benefited from globalization (and Thomas Friedman would agree that it has contributed to the world that we live in being flatter). It has been one of the fastest growing methods of doing business in the U.S. and abroad for the last half century. And franchising continues to expand its reach around the world. Approximately one out of every 12 businesses internationally is franchised. Although statistics vary, it is estimated that about 35 percent of all retail sales are in franchising, amounting to over a trillion US dollars annually. Indeed, the future of franchising is international, as the US market is highly saturated. Canada and parts of Western Europe are also saturated. Sixty percent of US franchisors currently have at least one outlet outside the United States. Because of these opportunities in international franchising, Ilan Alon and I edited the first comprehensive volumes on international franchising to be published. We devoted two volumes to emerging markets, what we considered the future of franchising, and two volumes to industrialized markets.

The most opportunities for franchising are in emerging markets. According to Czinkota and Ronkainen (1997), only 15 percent of the world’s population resides in developed market economy countries. Emerging markets contain 80 percent of the world’s population, 60 percent of the world’s natural resources, and the most dynamic potential for long-term growth to businesses and franchisors.

What is an emerging market? There are three characteristics associated with an emerging economy: economic growth, market governance, and the level of economic development. The level of economic growth is among the most important considerations for international franchising expansion.

Market governance influences a wide range of country risk elements such as: government regulation and red tape, political stability, kick-backs, ownership restrictions, controls of capital flows, and import restrictions. All of these factors are important to international franchisors’ evaluations of foreign market potential. Characteristics of emerging markets include a low GNP per capita, but a high potential for growth, unequal distribution of income, but a growing middle class, technological and regional dualism with pockets of development along urban centers, agricultural (less developed) and industrial (developing) economies, and high population concentrations and growth.

Challenges include lack of managerial and entrepreneurial talent, lack of capital for international franchising expansion, political instability and risk, regulatory uncertainty, and corruption, underdeveloped infrastructure, and lack of transportation and communication networks.

Highlighting the opportunities for franchising in one developing economy, China, (Langsha, 2005) reported that there are presently 1,900 franchise systems in the country, providing employment for 2 million Chinese workers. Opportunities in China are expected to expand dramatically, as the government recently cancelled restrictive prescriptions for foreign-funded franchises.

What triggers a franchisor to expand internationally? External factors, such as inquiries from prospective franchisees, are the reason most often cited, then opportunities for growth overseas. More recently, a closer examination that differentiated between market maturation and opportunity recognition found no support for the view that North American franchisors expanded into overseas markets because of domestic market maturation. I just served as guest editor for a special issue on International Franchising in the International Journal of Entrepreneurship and Innovation Management that will appear in a few months. In that issue, a study by John Clarkin found that the presence of area developers and master franchisees in a franchise firm is likely to influence monitoring and marketing capabilities. Previous studies have shown that the presence of master franchisees has been associated with higher system growth rates. In franchising, size and experience matter.

Franchising is a less expensive, less risky form of doing business than developing a start up company. The franchisor, or founder, of the unique business format system fits clearly into the definitions of entrepreneurship found in the literature as reviewed by Low and MacMillan (1988). That is, the creation of new ventures, carrying out new combinations, and being driven by the perception of opportunity. Franchising encompasses entrepreneurial characteristics such as the introduction of new products and services, innovative marketing, openness to change, outrunning the competition, and fast growth.

What about franchisees, those that operate the locations that we frequent? While franchisees differ from the traditional entrepreneurs in that they are buying a license from an organization that has a market tested concept and a structured set of operating procedures, usually decreasing their risk substantially relative to a traditional start-up business, they are still business owners, which classify them as a particular type of entrepreneur. Entrepreneurship entails being innovative, proactive, and willing to take risks. Despite the control of the franchisor, a franchisee still must commit to a certain amount of risk taking and proactiveness in running his business successfully.

Furthering international research has long been a goal of many international academic organizations and journals. In fact, in the June 2005 issue of the Academy of Management Journal, the editors examine international management articles that have been published from 1970 to 2004 to find out if they truly have increased the international scope of the journal. They concluded that, while there has been a dramatic increase in international management research in their journal, especially in the first half-decade of the 21st century, there is still more that needs to be done. (In the area of entrepreneurship, a study by Ireland, Reutzel, and Webb in the August 2005 issue found that 50 articles had been published between 1963 to the present, and the number of authors per published entrepreneurship paper is increasing, due to collaboration among scholars from multiple countries that have been formed to examine international entrepreneurship research questions.

In my opinion, there are many overlooked opportunities. International entrepreneurship will continue to be one of the cornerstones of business development in the Tampa Bay area and around the globe.
 

About the Author
DIANNE H.B. WELSH is the James W. Walter Distinguished Chair of Entrepreneurship, Professor of Management, and Director of the Florida Entrepreneur & Family Business Center at the Sykes College of Business at the University of Tampa. A recognized scholar in international entrepreneurship and franchising, she is co-editor of the first comprehensive volumes on global franchising in emerging and industrialized markets. Dianne is the author of over 100 published manuscripts that have appeared in the Academy of Management Journal, Journal of International Business Studies, Entrepreneurship Theory & Practice, Journal of Business Venturing, Journal of Small Business Management, and others.