Market conditions driving international franchising in emerging countries

Abstract

The present study examines how a number of market conditions may constrain entry mode choice into Middle East nations. Specifically, this paper focuses on master franchising and analyzes the determining factors in this entry mode decision. A quantitative approach was applied to a sample of Spanish franchisors operating through 96 franchisee outlets across 6 Middle East countries in January 2010. They are Bahrain, Cyprus, Israel, Jordan, Saudi Arabia, and United Arab Emirates. Findings show the importance of a number of host country’s features (economic development, corruption, and efficiency of contract enforcement). The scant theoretical or empirical attention given to the topic of foreign entry mode choice via franchising has usually been examined from a U.S. base and focused on developed markets. To fill this gap, the present study analyzes the international spread of the Spanish franchise system—ranked fifth worldwide both in terms of the number of franchisors (1,019) and the quantity of franchisee outlets (65,026)—into the Middle East. 1. Introduction The entry mode choice is the selection of an institutional arrangement for organizing and conducting business transactions. It determines the extent to which the firm gets involved in developing and implementing the strategy in the foreign markets, the level of control the firm enjoys its business operations, and the degree to which it succeeds in the target market. The entry mode choice is then one of the most critical decisions in international marketing [1–6]. Many forms of entry are available. Most literature distinguishes between equity and nonequity modes to enter foreign markets. Equity modes involve companies taking some degree of ownership of the market organizations involved, including wholly owned subsidiaries and joint ventures. In contrast, nonequity modes do not involve ownership and include exporting in combination with some forms of contractual arrangements such as licensing or franchising [6]. Choosing one or another entry mode may have enormous strategic consequences for the firm’s performance and survival [1, 7]. Regarding nonequity modes of entry, franchising can be defined as a licensing agreement between the franchisor and the franchisee, whereby the former grants the permission for the use of his trademarks, ideas, patent of goodwill in lieu of royalty or some other consideration by the franchisee [8]. This business format offers numerous advantages, as compared to chain-ownership, such as having owner-managers who are motivated in making their individual stores succeed.