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The franchising operations have expanded significantly during the recent years namely because of the benefits and reduced risks they offer to both parties. A positive example in this sense is given by international chain McDonald's, which franchised several of their stores to countries across the globe. The McDonald's example however also reveals that franchising is not always suitable, and it is far from being the universally agreed method of successfully penetrating the foreign markets. To better understand, before entering the Russian market, the officials at McDonalds clearly analyzed the market features and felt the need to handle the operations by themselves, rather than become a franchisor. As a result of increased attention to details, the American corporation now holds next to 80% of the Russian fast food industry. Other American-based fast food chains have attempted to enter the market, but they did this through franchising, and the economic background in Russia was not yet prepared to handle such operations. This only goes to show the need to adopt the market entry strategy to the unique characteristics of each host country. But even if franchising is not the perfect recipe for a successful penetration of a foreign market, it remains among the most preferred practices due to the benefits it offers the franchisor and the franchisee. Some of these benefits include:
Resource scarcity - this basically implies that the large company possesses limited resources and does not afford to internationally expand on its own. Rather than engaging in long-term debts, such as bank loans, or the issuing of stocks (rather difficult and costly for a small size business), which will both generate additional expenditure, the organization will simply choose to franchise their operations. As a direct consequence, the franchisee will bring in his own capital and will support as such the international development of the company. This particular usage of the franchising operations is most common in those cases where the primary company desires to repurchase its operations from the franchisees in a future time, when it will possess increased financial resources (Fried and Elango, 1997).
International cooperation and collaboration - This is yet another simple and justifiable reason why franchising operations are extremely successful for both parties when applied to international scale. Through engaging in such activities, both the franchisor and the franchisee become members of the same association and work together in order to accomplish the same purpose. Even if the collaboration between the two ends at a given time in the future, as foreseen by the resource scarcity theory, they will have managed to make an international acquaintance in a different country, acquaintance which could at one time help the further development of the organization. In other words, franchising operations set the basis for international strategic alliances and partnerships.
Corporate unity - the main reason for which the fast food industry is the most franchised one is given by the impossibility to separate the time of production, sales and even consumption by the final customer. And through international franchising, companies don't even have to consider this impediment any more (Castrogiovanni, Combs and Justis, 2006)
Employee performances - the modern economic theory teaches the company official that it is in the organization's best interest to invest and motivate its human resource. They must learn how to align the individual needs of the staff with the overall goals of the organization in order to increase the efforts and performances of the staff in supporting the company reach its objectives. However, this mostly happens only in theory. In practice, the employee is aware that his goals are not identical to those of the firm's, and he is therefore only limitedly motivated to increase his performances. But if the potential employee becomes a business partner, a franchisee, working in his own benefit, investing his own capital and retrieving results based on his efforts, it is most likely for him to increase his performances. "Managers (the agents) will tend to shirk in their duty to the firm (the principal) because their compensation is fixed. As a result, high monitoring costs will be incurred by the firm to insure that its managers act in the firm's best interest. Hence, franchisee-owned units are likely to perform better than company-owned units because the contract between the principal (franchisor) and agent (franchisee) is designed to keep their financial interests closely aligned." (Fried and Elango, 1997)
Division of responsibilities - This basically implies that the two partners share both the revenues, but also the losses. In this particular sense, were the franchised operation to end a fiscal year on a negative growth, the loss would be divided among the two partners, rather than just one, making it as such easier to bear. In other words, franchising operations reduce risks for both international partners (Norton, 1988). In addition, however it binds them through a contract, it also allows them some level of freedom. A primary characteristic is that "franchising is the unique division of responsibilities, decision fights, and profits specified in franchise agreements. In exchange for an up-front fee and an ongoing royalty tied to franchisee sales, franchisors establish and enforce performance standards, and coordinate areas such as advertising and purchasing where scale economies are available. Franchisees build local outlets and oversee their day-to-day management in exchange for the rights to all profits remaining after royalties and other costs are paid" (Castrogiovanni, Combs and Justis, 2006).
Economies of scale - Economies of scale are even today an increasing problem within international markets and franchising operations can be used to overcome the impediments posed by these economies. "Franchising allows the firm to exploit these economies of scale and at the same time to shed 'risky' locations and retain more profitable sites as company outlets" (Martin, 1988)
All in all, the franchising operations are increasing in the role played within the international context mostly due to the benefits they offer to both partners. For the franchisor, the operations imply an easy penetration of the market and development opportunities with reduced and shared risks. In addition, they also ensure the primary firm that their rights, licenses and patents and safe. To the franchisee, international franchising operations mean a rather reliable source of income and also allow him to easily enter the market, based on the international reputation of the foreign company. In other words, he benefits from the advantages deriving from an internationally recognized brand. But even with all advantages it presents for both partners, franchising remains one market entry policy, which must always be developed in accordance with the characteristics of both market and company.
Castrogiovanni, G.J., Combs, J.G., Justis, T.R., Shifting Imperatives: An Integrative View of Resource Scarcity and Agency Reasons for Franchising, Entrepreneurship, Theory and Practice, Volume 30
Fried, V.H., Elango, B., 1997, Franchising Research: A Literature Review and Synthesis, Journal of Small Business Management, Volume 35
Lafontaine, F., Shaw, K.L., 1999, the Dynamics of Franchise Contracting: Evidence from Panel Data, the Journal of Political Economy, Volume 107, Number 5, pages 1041-1080
Martin, R.E., 1988, Franchising and Risk Management, the American Economic Review, Volume 78, Number 5, pp.954-968
Norton, S.W., 1988, an Empirical Look at Franchising as an Organizational Form, the Journal of Business, Volume 61, Number 2, pp.197-218
Preble, J.F., Hoffman, R.C., 1995, Franchising Systems around the Globe:…[continue]
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