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Current Trends and Research in International Franchising
International Franchising in General
As globalization plays an increasingly prominent role in the world economy, businesses are actively seeking to expand their operations abroad. The rise of franchise operations in countries such as China and India is sending a strong signal to long-established franchises and newly-established franchises alike that international franchising is here to stay.
Fifteen years ago, relatively few franchisors were operating internationally, and the ones that had gone international were typically the very large ones. By early 2011, 32 percent of the franchise units operated by the top 200 franchisors in the United States were located outside of the U.S. That percentage represents a 33 percent jump in the number of international units operated by those franchisors over the previous 10 years.
In addition to the United States, franchises in countries such as England, Australia, and Canada have found a high level of success in spreading their business concepts around the world. And additional players in places like France, Spain, and Germany are getting into the international franchising game, and experiencing marked success too.
Where Franchising is Growing Internationally
The U.S. Department of Commerce estimates that over 75 percent of the expected growth in the world's trade over the next two decades will come from developing countries, specifically emerging markets. Eighty percent of the world's population lives in these emerging markets, but they currently only combine for an estimated 25 percent of the world’s gross domestic product.
When you hear the phrase “emerging markets”, typically the first countries to come to mind are the larger ones such as the “BRIC” countries of Brazil, Russia, India and China, along with maybe a couple others. However, smaller countries have future growth potential that simply shouldn’t be ignored. Several countries in places such as the former Soviet Union, former Yugoslavia, as well as Eastern Europe, Asia, and Latin America fit into this description. African countries are also now beginning to see an uptick in franchise activity.
Although they are becoming more financially-sound and developing a stronger middle class, these countries still haven’t been cultivated by a high number of franchisors. Consequently, hopeful entrepreneurs within these countries are generally eager to learn business principles through the methods and procedures franchisors have to offer.
Franchise businesses have quite a bit to offer emerging markets because they are designed to be replicated. Thus, they require less experienced entrepreneurs, and provide business-learning opportunities within a support structure. All of this can help emerging market countries further develop their economies.
Items to be Considered
When a franchise decides to expand into a different country, it is imperative that the franchisor take into consideration all aspects of the area they are targeting, including the economic, political and social climate. Important considerations include whether or not resources and capital are available to the target group of qualified potential franchisees, the possibility of supply-chain issues such as availability of fuel or other necessities required to run the franchise, and assessments of the political climate of the region. The future of this region, including the possibility of political instability or a rise in regulations that hamper franchise growth, must be taken into account as well.
While common attributes of U.S. legal concepts are finding their way into more international contracts, it is still important for franchisors to heed the culture, and more specifically the business environment, of the market they are entering.
There are many countries where people are likely to conduct business based on their personal relationships instead of relying on contractual obligations. This is especially true in Latin American countries as well as China.
In areas such as the United Kingdom, Singapore, and Australia it is advised that franchisors provide detailed information and focus on specifics within the contract. It is also advisable to work with local legal counsel to smooth over misunderstandings that may arise from translating U.S.-based franchise contracts that are typically based upon common law to contracts in countries governed by civil law.
In addition, many countries have their own set of franchise regulations that must be adhered to. Organizations such as the International Franchise Association and the International Trade Administration branch of the U.S. Commerce Department offer franchisors who seek to operate internationally many of the resources they will need during the process.
Interactions between the franchisor and franchisee are particularly important, and in choosing a franchisee, the franchisor must consider how their partner will fit into the overall strategy of the organization, how that particular country’s market will perform and whether or not the franchisee is qualified to become a franchise partner.
Franchisees are typically drawn to franchisors that are aware of the local environment and status of the market, and are willing and able to communicate openly with the franchisee. Besides the tangible criteria, the franchise partners must have chemistry in order to successfully form their partnership.
A Final Thought
According to Kristin Houston, leader of the U.S. Commercial Service Global Franchise Team, “95 percent of the world’s potential consumers are beyond U.S. borders.” Going international is a great way for franchisors to sustain growth opportunities for their business for years to come.
Sources: Franchising World Magazine (March 2011); International Journal of Hospitality Management (2006); U.S. Commercial Service; International Franchise Association