Towards a Macro Environmental Model of International Franchising

Abstract

Despite the recent growth in international franchising little is known about the country factors influencing the expansion of international franchising. This paper develops macro environmental model of international franchising that fills this void in the literature by examining the country factors associated with the expansion of US international franchising. The factors influencing US international franchising are divided into (1) economic, (2) demographic, (3) distance, and (4) political dimensions. These factors should be useful to both franchisors wishing to expand to foreign markets and academicians wanting to build empirical models explaining the internationalization of US franchising systems. INTRODUCTION Despite the rapid expansion of US international franchisors into foreign markets, little is known about the country factors influencing this behavior. The recency of the internationalization of US franchise systems coupled with the scant theoretical attention given to the subject provide the need for an explanatory model of US international franchising. It is the objective of this paper to develop macro environmental model for international franchising that would be useful to academics wishing to construct empirical models as well as to franchisors wishing to establish ventures in international markets. Franchising is growing method of doing business both domestically and internationally. It started in the United States in the early 1900s, but did not gain acceptance worldwide until the 1960s. The recent growth in international franchising was fueled by both push factors, such as saturation, competition, and diminishing profits in the domestic market, and pull factors, such as the liberalization of the Eastern block countries, the formation of regional trading blocks, and the emergence of some newly industrialized countries in the international market place. The initial internationalization efforts of US based franchisors were directed toward Canada, Britain, and Australia, countries that are culturally, politically, and economically similar to the United States. As franchising systems matured in these countries, profit potential decreased because of increasing domestic and international competition (Welch, 1992). Therefore, US based franchisors had to seek growth avenues in less developed, culturally dissimilar or politically unstable countries. These environments presented new set of challenges which often required changes in the product/service mix, contractual arrangements or methods of operation. With the increased diversity of countries in which franchisors sought potential outlets came the need to develop systematic way to evaluate potential host countries. The standardized nature of franchising necessitates high degree of cooperation and control by the franchisor, which is complicated in multicultural context. This article develops model that judges the investment climate of host country from an international franchising perspective and provides starting point for comparative analysis of competing locations around the globe. This model considers four factors important to country analysis including ( 1 ) economic, (2) demographic, (3) distance, and (4) political variables. These categories were used to group the environmental variables that were discussed in the literature of international franchising. Information from governmental (Kostecka, 1988), conceptual (Eroglu, 1992), survey (Arthur Andersen, 1996), and empirical (Yavas, 1988) studies was used to build the model. The focus of this paper is on business format franchising because it was shown to provide faster growth than product name franchising in the domestic market (Kostecka, 1988) and was the source of most of the successful international franchising ventures (Burton and Cross, 1995). Burton and Cross ( 1995, p. 36) defined international franchising as a foreign market entry mode that involves relationship between the entrant (the franchisor) and host country entity, in which the former transfers, under contract, business package (or format), which it has developed and owns, to the latter. …

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