International Franchising in Emerging Markets: Central and Eastern Europe and Latin America

Citation

McKenzie, B. (2002), "International Franchising in Emerging Markets: Central and Eastern Europe and Latin America", International Journal of Service Industry Management, Vol. 13 No. 3, pp. 303-308. https://doi.org/10.1108/ijsim.2002.13.3.303.1

This recent text is part of a two part series examining the growth of business and service franchising within emerging markets (the companion book looks at similar issues with a focus on China, India, and other Asian countries). The editors of the book, Welsh and Alon, have a long history of involvement in franchising research, and have put together a very interesting series of 16 papers that examines a growing business phenomenon, but one that has received little spotlight in research.

Franchising, as its own field of study, continues to represent a growing and important area of services and retailing research, while the emerging market (EM) literature, both in terms of academic and the popular press, has received considerable attention in recent years. With the fall of the Soviet Union in the early 1990s, and the subsequent transition by its former republics and the regions of Central and Eastern Europe (CEE) from planned to market economies, together with the attention to growing small and medium size enterprises (SME) in Latin American countries, makes this book a helpful text that is both interesting to academics who wish to better understand this research field, as well as for practitioners who may be exploring the possibility of entering or expanding their franchising operations into these markets.

The first third of the book provides a varied account of franchising research and franchising operations, both in historic and recent times. The next section of the book examines franchising practice and theory, while the remainder of the book provides franchising case studies in a variety of EMs. The book concludes with a review and call for future research in this field (the reader benefits from helpful executive summaries which are provided for each chapter).

The book begins with an introduction by the editors, who provide an overview and background of why international franchising research is an important area of study. Definitions of EMs are provided, along with some early literature in this field.

The first paper, by Swartz, provides a detailed review of franchising in general, with a discussion of opportunities and threats that franchising presents to perspective franchisors and franchisees. The review summarizes recent franchise activities in EMs. A number of franchising generalizations are presented, but additional information as to why franchising versus other business formats are best suited for these markets would be helpful.

The next chapter, by Kaufman and Leibenstein, presents a popular article originally published in 1988 in the Journal of Development. The paper presents a historical review of the growth of international franchising from the view of the franchisee, franchisor, and respective governments. The authors provide a helpful script of topics that need to be considered in this field, such as concerns with finding the proper franchise niche (a niche the local governments will support), being respectful of trademark laws, and the extra costs that may be incurred when operating in these regions. Although the statistics from the original article are dated, Kaufmann’s postscript (Leibenstein passed away in 1994) provides more recent information. Kaufmann’s thoughts on what has changed since the original article was published, particularly the role of the Internet and related technology, and a call for a better understanding of which markets are the most opportune for homogenization, are included.

Stanworth, Price and Purdy’s article examines the role that franchising can play as a source of technology transfer within EMs, which seems to support the view that franchising is often the best way to rapidly bring advancements to these EMs. The authors discuss the value and benefit franchisors bring to local markets and how franchising does or does not promote the growth of entrepreneurial talent. The authors describe how franchisors often go against their chosen path of development in order to be able to enter EMs successfully (examples include McDonald’s in Russia, which had to vertically integrate to ensure success, and how franchisors entering Indonesia and China need to initially enter into joint ventures). Negative aspects of franchising, from the host country’s perspective, are presented, with the example of Brazil noted, which, as a result of foreign franchising, has experienced a loss of economic diversity, and displacement of local businesses.

The contribution by authors Thompson and Merrilees provides a voice for how franshisors can best foster international franchise expansion. Their work is supported by case studies of Australian firms that have expanded internationally. Their thesis encourages a modular approach to marketing, branding and operational franchise activities, which will best meet the demands of international markets. The authors segregate those franchising activities that are core elements within each module, elements which should be standardized across all markets. In contrast to core elements, there are also peripheral elements, such as culture, language and government relationships that should be adapted to the specific market. The article concludes with a prescription for international franchise success that includes employing in depth local research, the careful selection of lead “new” country markets from which future expansion can occur, due diligence in franchisee selection, having brand support through operational direction (manuals), and the careful use of contracts.

The final chapter on franchising practice theory and development, by Dana, Eternad, and Wright, examines the role of franchising growth in an EM from a network perspective. The authors review how knowledge gleaned from franchising history can be used in conjunction with network literature to use franchising to bring advanced and emerging economies together. The authors further support the position that franchise networks can lead to advances in knowledge networks.

The remaining ten chapters provide interesting examinations of franchising activities and practices in specific EMs. Alon and Banai’s paper analyzes research findings of surveys of American and Russian business leaders. The authors purport that Russia’s markets and business conditions may be similar to other EMs, but Russia’s educated workforce and consumers’ consumption appetite is more similar to developed markets. The Russian marketplace of 150 million people immediately attracts many franchisors to the region, but as noted, even with a plentiful, inexpensive and highly educated labour force, deficiencies in transportation and service delivery lessens this appeal. The authors point out that although Russians have a pent up demand for foreign goods, recent domestic economic and social troubles make foreigners a good target for blame. The paper concludes with a list of the economic and operational issues that need to be weighed by franchisors when considering expansion into Russia.

The paper by Swerdlow, Roehl, and Welsh, further explores the Russian marketplace by focusing on the hospitality franchising industry. A review of franchises that were initially successful in Russia (McDonald’s, Pizza Hut, Marriott) are shown to be linked in their ability to deal with the economic instability, high crime rate, political upheaval, and social uncertainly, that permeates the country. Based on empirical data, the authors found significant differences between Russian and US employees in their working relationships in terms of work attitude, work satisfaction and co‐worker interaction. Echoing the points addressed in the previous paper, a better understanding by franchisors of the managerial culture, and the ability to understand and work within a strongly government influenced marketplace, are key.

Sanghavi’s paper examines how franchising can assist EMs in the development of SMEs, with the focus on Central Europe. The role of the franchisee should not be viewed as they often are in developed markets as an “independent hero entrepreneur”, but as the best manner in which to develop a business and management culture. Franchisors in these markets must be concerned with the protection of their intellectual capital, the ability to repatriate profits, and be conscious of the fact that domestic firms may clone their business operations and practices. Franchisors must understand the effect that having operations in EMs may have on their overall corporate structure and strategy, particularly in spreading scarce executive skills too thinly. Franchisors must also have a willingness to alter their marketing strategies to suit the local marketplace (but not too drastically that the changes may negatively impact on the overall franchise brand). The paper concludes with a debate on how much more franchising can do to improve SME growth.

The next article continues with the examination of Central Europe, in this case, franchising in Slovenia. Pavlin reviews the current franchising climate in Slovenia, and discusses how franchising in markets such as Slovenia has to be viewed in conjunction with their country’s aspirations for acceptance into the European Union (EU). Franchisors wishing to enter EU “fast track” countries such as Slovenia will benefit from these countries’ governments’ having to focus on the protection of franchisor (and other business) rights as a condition of joining the EU. The author also cautions that the rapid creation of new firms in Slovenia (as in other EMs) was not because of solid business rules/reasons for establishing these businesses, but out of fear of missing out on the early stages of market transition. The desire for subsistence for their owners, versus any real entrepreneurial character, was the norm.

Nediakova’s article looks at franchising in Bulgaria. The author notes that Bulgaria, because of its geographical location, has ties to both the East and West, and the North and South regions of Europe. Like Slovenia, Bulgaria has expressed interest in joining the EU, and the government of Bulgaria supports franchising as a way to encourage SME growth. Nediakova reviews some of the early franchising history of Bulgaria, and an overview of domestic Bulgarian franchises. The author highlights some of the challenges franchisors have had in entering Bulgaria, where even though the central government played a dominant role for many years, and collected data on just about everything, the result has been little in the way of usable market information. The establishment of a Bulgarian franchise trade association has helped to promote and educate the business community about franchising, but unfortunately large foreign‐based franshisors located in Bulgaria do not participate. Nediakova describes how franchising can help to address the challenge of meeting the need for improved customer satisfaction and the marketing of high quality products at reasonable prices, areas that are critical in the development of EMs. The author indicates that franchising success should result in Bulgaria because of the reasonable real estate costs, low labour costs (skilled and trainable), and a strong market demand.

The final chapter on Central Europe, by Viducic and Brcic, views franchising as an internationalization strategy for firms, and uses Croatia as their example. The authors see franchising as the quickest route to firm internationalization, and a way to best homogenize needs and wants in varied markets. The authors note that a franchisor’s knowledge of local tax/accounting/financing laws and the ability to negotiate legal rights are critical. The difficulty in domestic franchises being able to match foreign franchisor strategy results from their inability to gain foreign capital. In order to overcome this hesitation, franchisees must convince lenders that promoting Croatia can be a springboard to expansion to other Balkan countries.

The paper by McIntyre looks at franchising from a significantly different market from Russia and Central Europe, that of Brazil. Franchising has a long history in Brazil (since the 1950s), and Brazil represents the third largest franchising market in the world (after the USA and Canada). Unlike franchises in other EMs, Brazilian franchisors, have had some limited success through expansion into other EMs (in Latin America). This success can be partially linked to the Brazilian government, which has been favourable to the franchising sector, particularly in terms of repatriation of royalties. The Brazilian franchise market has very distinct regional patterns based on wealth (South/SouthEast as postivie markets, other regions, less so), and as in other countries, the fast food sector leads the franchise industry. The author points out that over 80 per cent of the Brazilian franchises are home grown, and that one fast food restaurant, Habib, is second only to McDonald’s in Brazil. The paper concludes with a call for further examinations of countries in other parts of Latin American that, like Brazil, continue to demonstrate a strong desire for American products and franchises.

The next three papers look at the Mexican franchise market. The articles examine the market in different lights, from the impact of the North American Free Trade Agreement (NAFTA), franchising and globalization, and a specific case study.

The first paper, by Falbe and Welsh, presents the findings of a comparative survey of US, Canadian and Mexican executives’ perceptions of franchising. The study discusses the five factors associated with franchise success/failure; system quality, brand name, local environment, communication, and franchise activities. The most significant difference between the countries was country of origin effects (COE). The paper contributes to the voice for studying regions that encompass both developed and emerging markets, specifically regions which operate under recent trade agreements such as NAFTA (as well as the previously noted growth of the EU), agreements that will be expected to continue to expand.

The paper by Teegen takes a more in‐depth view of the Mexican marketplace itself, and presents some interesting findings on culture. One example, the term “malinchismo”, describes the preference by consumers for imported products, and literally translates into “selling out of local producers”. In support of the previous papers findings, Teegen highlights how COE can have a direct impact on international franchising, and necessitates a thorough analysis of a marketplace beyond traditional business drivers. Concerns are raised that when foreign franchisors enter markets such as Mexico, instead of creating additional jobs and growth, the franchisors buy up/buy out local establishments, and reduce competition. The author points out that in Mexico, unlike in the countries of Central and Eastern Europe, and the former Soviet Union, franchisees often view their franchise as a source of passive income, with little intention of investment in growing the business.

The final paper on Mexico, by Hadjimarcou and Barnes, presents an informative case study of a small American franchised fast food restaurant, Silver Streak, and how it has successfully expanded into Mexico. The authors describe how the owners of Silver Streak selected a Mexican firm that already operated other restaurants, and drive thru cleaners (supporting Teegen’s point on franchisee passive income). The Silver Streak franchisors were heavily dependent on the Mexican franchisee’s ability to acquire land (the authors point out that in Mexico, the norm is to swap land, therefore making franchisors dependent on franchisees possessing certain assets that would not have been important domestically), and in their ability to collect accurate marketing research. Although Silver Streak benefited from having American locations near the Mexican border, and thus having some pre‐existing brand and advertising recognition in Mexico, it none the less needed to adapt the Silver Streak concept to the Mexican marketplace. This case provides a good contrast to other EM examples, where a potential franchisee with solid government connections outweighs a franchisee’s wealth.

The final chapter, by the editors Alon and Welsh, reviews the findings from the previous papers as well as describing the roles of the major franchise stakeholders in EMs; the franchisor, franchisee, host market, home market, and consumers. The article addresses the ongoing international adaptation/standardization debate, which is further complicated by the rapidly changing and evolving nature of EMs. Topics listed for future study include, first entry advantage, the role of international partners, location specific marketing mix variables (particularly pricing), appropriate types of training programs, financing options, and the greater emphasis on emerging technology and operational process such as Internet and intranet technology, and the use of shared networks.

In conclusion, this text provides a solid read on a number of diverse and complementary articles on franchising, a business field that continues to grow, but more importantly in a particular market setting that has expanded, and will continue to expand and provide future franchising growth. Future works of this nature would be best served by additional empirical studies, and challenges to the theoretical basis for existing franchising models. Existing models are often based on developed market institutions and norms, which may not easily translate within markets that are only now experiencing the personal freedoms, and laissez faire business/government attitudes that developed markets have experienced for many decades. As the varied findings of these papers indicate, developed and emerging markets do differ, and franchising (and other services) research must reflect this.