Success factors of entering emerging markets through international B2B franchising

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Success factors of entering emerging markets through

international B2B franchising

by

Jovana Urukalo

University of Groningen

Faculty of Economics and Business

Master’s Thesis IB&M (EBM719A20)

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Preface

You are about to read the final piece of work for my master studies International Business and

Management at the University of Groningen. I am very pleased to have been able to

successfully complete this final step of my master.

I would like to take this opportunity to thank all the people that have helped me in the process

of writing this thesis. Firstly, I would like to thank my first supervisor Dr. Miriam Wilhelm

for all her time and effort in providing me guidance and giving me valuable and constructive

feedback. Also, I would like to thank Dr. Evelien Croonen for her help and for reviewing my

thesis as a second supervisor.

Thirdly, I would like to thank Mr. Burgers and his colleagues at the Dutch Franchise

Association (NFV). The NFV has provided me with valuable insights on franchising and

helped me with contacting the case companies for which I am really grateful. Fourthly, I

would like to thank the interviewees of the case companies who have despite their busy

schedules taken the time to participate in my research. I really appreciate the willingness of

the NFV and the case companies to help with my research.

Lastly, I would like to give a special thank you to my parents and sister for their unconditional

love and support throughout my study period.

A short message for the reader; I hope you will enjoy reading this thesis.

Jovana Urukalo,

Zwolle, June 2014

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Abstract

The aim of this thesis is to look into the success factors of entering emerging markets by

means of international B2B franchising. The existing literature on international franchising is

predominately based on research conducted in a B2C context with fashion retail, food and

beverages and hotel industry being the prime examples, and the focus has been mainly on

franchising domestically and in developed markets. Thus, a research gap exists concerning the

specific context of B2B franchising and emerging markets. This thesis fills this gap by means

of a multiple case study on international B2B franchising in emerging markets.

Based on interviews with three case companies, this thesis presents evidence that indicates

that B2B franchising differs from B2C franchising which has implications on the successful

entry of foreign markets by means of franchising. Also, this thesis presents evidence that

indicates that successful entry into emerging markets requires franchisors to pay attention to

the unique emerging markets context which adds difficulties and requires a different approach

than the one used in developed markets.

Key words: International franchising, B2B franchising, emerging markets, contractual

alliances, strategic alliances

Research theme: International strategic alliances

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1. INTRODUCTION

We have witnessed a significant increase in the use of strategic alliances for conducting

business abroad (Kauser & Shaw, 2004). The underlying logic is that strategic alliances

enable companies to exploit new opportunities, create value and enhance their competitive

advantage across countries. Within the domain of strategic alliances there are multiple

governance modes ranging from market-based contractual alliances to hierarchical modes

such as joint ventures (JVs) (Chen & Chen, 2003). Multinational companies have used both

market-based and hierarchical forms of strategic alliances. Hierarchical forms such as JVs

offer a higher degree of control and influence in the local operations. However, this control

comes with a price as JVs offer less flexibility, increased difficulties with dissolution and

greater legal encumbrances compared to contractual alliances (Chen & Chen, 2003).

A frequently used contractual alliance is franchising; in 2010 there were 21.528

franchise brands active worldwide (European Franchise Federation, 2010). Franchising is a

legal business agreement in which one party (the franchisor) grants another party (the

franchisee) the right to operate an independent business using the franchisor’s know-how and

brand name, in exchange for a financial contribution (Webber, 2013). Although franchising is

often used interchangeably with licensing, the two concepts differ substantially. Unlike with

licensing, the franchisor has more influence and control over the operations as there is a more

integrated relationship between the two requiring them to work together rather than operate

independently (Das & Teng, 2000). Franchising as a foreign market entry mode is referred to

as international franchising and it is considered as a means of expanding national borders with

minimized risks and costs (Kedia, Ackerman, Bush & Justis, 1994). This is because the

franchisor can give the responsibility of running the local unit to the local franchisee that is

more familiar with the market and thus possess the required knowledge to successfully run it.

Hence, it is not surprising that international franchising is used to expand to geographically

distant locations (Norton, 1988). The rationale behind it is that the more distant the local

operations are, the higher the costs are of monitoring company-employees (Shane, 1996).

However, despite the advantages international franchising is not a cost-free market entry

(Castrogiovanni & Justis, 1998). The relationship between the franchisor and the franchisee is

best captured by the agency theory in which the franchisor (principal) delegates the franchisee

(agent) the authority to implement the franchisor’s business format in the local market. Due to

the nature of the relationship there are several issues that arise. The relationship suffers from

information asymmetry as the franchisee has much more detailed knowledge of the operations

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in the foreign market (Quinn & Doherty, 2000). Moreover, the relationship has a potential for

a conflict of interests as the franchisor benefits from system-wide sales, whereas the

franchisee benefits mainly from that of the local franchise unit (Castrogiovanni & Justis,

1998). Consequently, the franchisor is uncertain about the behavior of the franchisee as there

is the possibility of the franchisee putting less effort or acting in self-interest (Diaz-Bernardo,

2012). The increased distance further enhances these difficulties as it limits the ability of the

franchisor to gather and receive complete and timely information about the operations in the

foreign market (Fladmoe-Lindquist, 1996). Particularly, in the case of emerging markets the

physical and cultural distance exacerbate these issues and further complicate the relationship.

A possible consequence of these issues is that the franchisee could act opportunistically

(Boulay, 2010). Storholm and Scheuing (1994) found that the most common opportunistic

actions carried out by the franchisees are: 1) releasing of proprietary information of the

franchisor to outsiders, 2) failing to pay royalties, and 3) not adhering to the quality standards

of the franchise agreement. Considering that these actions can harm the franchisor

substantially in the local as well as the global market, the franchisor is rightly concerned with

how it can successfully utilize franchising as a market entry.

The existing literature on franchising has focused predominantly on domestic

franchising (Quinn & Doherty, 2000), thus in general there has been limited research into the

international expansion practices of franchisors (Altinay, 2006). Within the domain of

international franchise research the focus has been on propensity to franchise internationally

(e.g. Dev, Erramilli & Agarwal, 2002; Sashi & Karuppur, 2002), domestic vs. international

franchising in terms of capabilities required (e.g. Shane, 1996; Fladmoe-Lindquist, 1996), and

the different international franchise modes (e.g. Garg & Rasheed, 2003; Brookes & Ropes,

2011). Although the existing research has contributed considerably to the knowledge on

international franchising, there are still research gaps present and this thesis aims to fill two

research gaps concerning international franchising. Firstly, within the existing literature no

distinction is made between business-to-consumer (B2C) and business-to-business (B2B)

franchising. However, generally the research conducted is focused on B2C as the retail

industry has been the dominant research context (Chabowski, Hult & Mena, 2011), examples

are fashion retail (Petersen & Welch, 2000) and food & beverages (Paik & Choi, 2007), but

also other B2C industries have received attention such as the hotel industry (Pine, Zhang &

Qi, 2000). Thus, the existing literature is predominantly based on research conducted in a

B2C context. The customer group of B2B providers is generally much smaller than with B2C,

and the customers of B2B providers are professionals that make a rational choice for

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cooperating with the company, whereas with B2C the decision of the customers is often

impulsive and driven by brand loyalty. Thus, the belief is that B2B franchising could differ

from B2Cfranchising. Secondly, as indicated franchising is often used as an entry mode for

distant markets and for Western franchisors these are typically emerging markets. Emerging

markets are typically characterized by institutional voids and weak mechanisms for contract

enforceability (Khanna & Palepu, 1997) which could influence franchising activities.

However, franchising in emerging markets is a relatively new practice, thus research on

international franchising in those countries has been sparse (Baena, 2012). The research that

has been done has predominately focused on host country conditions (Anttonen, Tuunanen &

Alon, 2005; Baena, 2012) and the effects of franchising on emerging markets (Alon, 2004).

Thus, not much attention has been placed specifically on how a franchisor can successfully

franchise within an emerging market context.

Hence, the aim of this thesis is to extend the knowledge regarding international

franchising by researching how B2B franchisors can successfully enter emerging markets. In

order to research this, the following central research question is formulated:

What are the key success factors in the process of entering emerging markets through

international B2B franchising?

The following sub-research questions will be dealt with:

1) What is international franchising?

2) What are the stages in international franchising?

3) What are the key success factors in the stages of search, partner selection, contracting

and franchisee management?

4) What are the managerial implications for companies that choose to enter emerging

markets through international B2B franchising?

The remainder of this thesis is structured as follows. In the next section a literature

review is presented in which international franchising and the stages of it are dealt with.

Section three discusses the research methodology, after which in section four the results of the

research are presented. In section five the results are discussed and several propositions are

proposed. Lastly, in section six managerial implications and limitations are presented.

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2. LITERATURE REVIEW

The purpose of this section is to review the existing literature on international

franchising with the aim of explaining the relevant theoretical concepts and providing an

overview of key success factors according to the existing literature. Firstly, the concept

international franchising is explained. Secondly, the stages in international franchising will be

depicted. Thirdly, at each stage in the process key success factors will be identified. Lastly, an

overview will be provided of the success factors at each stage which will serve as a basis for

the case study research.

It must be noted that although the focus of this thesis is specifically on B2B franchising,

there is no distinction made between B2C and B2B franchising in the literature. Thus, for the

purpose of this thesis the existing general franchising literature is used.

2.1. International franchising

Franchising originates from the US where it first emerged in the early 19

th

century in the

form of product franchising which is also referred to as first generation franchising. In this

form of franchising the franchisee is given the right to sell the product in return for a financial

contribution, however little to no support is provided by the franchisor as the product is

central to the agreement and not the entire business format. Product franchising is very similar

to licensing and is also the reason why the terms franchising and licensing are often used

interchangeably (Fulop & Forward, 1997). However, this form of franchising is side-lined

from the debates on contemporary franchising because the franchise system commonly in use

nowadays is the second generation franchising or business format franchising (Quinn &

Doherty, 2000). For instance, in the US business format franchising has twenty times as many

establishments as product franchising (International Franchise Association, 2011). Business

format franchising can best be defined as ‘’the granting of a license for a predetermined

financial return by a franchising company (franchisor) to its franchisees, entitling them to

make use of a complete business package, including training, support and the corporate name,

thus enabling them to operate their own businesses to the same standards and format as the

other units in the franchised chain’’ (Grant, 1985:4). The relationship between the franchisor

and the franchisee within business format franchising is highly integrated and the parties to

the agreement do not operate independently but rather work together and combine their forces

(Fulop & Forward, 1997). Hence, with business format franchising the role of the franchisor

goes beyond simply providing permission to use the trademark as the franchisor also provides

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support, training and advice throughout the relationship. The focus of this thesis is on

business format franchising.

The early franchising activities took place solely in a domestic-context in the US, and it

was not until 1960s that franchising gained acceptance worldwide (Alon & McKee, 2006).

Since then the use of franchising as an internationalization strategy grew and by 1990 one in

every six US-based franchisors had expanded their operations abroad (McIntyre & Huszagh,

1995). Franchising in the international arena changes the composition of the franchise

relationship as unlike with domestic franchising, international franchising involves foreign

franchisees. International franchising can be best defined as ‘’a foreign market entry mode

that involves a relationship between the entrant (the franchisor) and a host country entity, in

which the former transfers, under contract, a business package (or format), which it has

developed and owns, to the latter’’ (Burton & Cross, 1995:36). International franchising was

utilized at first by franchisors as an entry mode into other developed countries. However, as

the markets of developed countries are saturating and profit potentials are diminishing,

franchisors are increasingly interested in finding franchise opportunities in emerging markets

(Anttonen et al., 2005). Emerging markets offer several advantages to franchisors such as

relatively unsaturated markets, liberalized markets and huge demand for Western-style goods

and services (Welsh, Alon & Falbe, 2006). Also, as these countries become industrialized

more companies require manufactured technology and governments require

infrastructure-related products and services in order to modernize their countries (e.g. water management,

communication routes), making these countries very attractive to B2B operators (Gauzente &

Dumoulin, 2010). Due to these advantages and the exceptional growth that emerging markets

are experiencing it is not surprising that much of the international franchising activities in the

recent years have been accounted for by expansions into emerging markets (Alon, 2004).

2.2. Stages in international franchising

The stages in the process of entering emerging markets through international

franchising will be viewed from a relationship development perspective. This is because the

relationship between the franchisor and the franchisee makes international franchising a

unique strategy and differentiates it from the simpler contractual agreements such as

licensing. Research on the process of relationship development within international

franchising is limited (Altinay & Brookes, 2012) and the article of Doherty and Alexander

(2004) is the only one that presents a relationship development process that is specific to the

international franchise relationship. The authors conducted a multiple case study with six

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major UK-based international fashion retailers with the purpose of further developing the

understanding of the relationship development within international franchising. The outcome

of their research is a four-stage process: recognition, search, evaluation and partnership. These

four stages will be used in this thesis as the center around which success factors will be

identified. However, the stages are adapted to better fit the purpose of this thesis. The

recognition stage in which the franchisors recognizes there is a need to develop a relationship

will for the purpose of this thesis be skipped as it is assumed that this recognition is present

with franchisors that seriously consider franchising as a viable foreign market entry mode.

The evaluation stage is rephrased to partner selection but the core idea remains. The stage of

contracting is added because with franchising the contract is one of the fundamental aspects

and particularly in emerging markets this stage could play an important role (Sotos, 2011).

And lastly the partnership stage is rephrased to franchisee management, but the main idea of

managing the relationship remains. Thus, as shown in the figure below the four stages are;

search, partner selection, contracting, and franchisee management.

FIGURE 1:

Stages in international franchising

Source: Adapted from Doherty and Alexander (2004)

2.3. Stage 1: Search

In this stage the search process for potential markets and franchise partners is initiated.

According to Doherty (2009) this can occur through an opportunistic or strategic approach.

In case of a strategic approach market selection precedes partner selection, and what

makes this approach strategic is that the search process is rational and that franchising is part

of the long-term objectives of the company (Doherty, 2009). The process starts by carefully

examining and screening potential markets, after which the decision is made regarding the

target market which is followed by franchise partner selection based on well-defined selection

criteria (Altinay, Brookes & Aktas, 2013). With a strategic approach much emphasis is placed

upon researching whether the franchise system and the brand would be successful in a

particular market. This requires substantial amount of time to be devoted on evaluating and

Search

_selection

Partner

Contracting

_management

Franchisee

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visiting the target market in order to be able to make a well-informed decision on whether to

enter that market through franchising or not (Doherty & Alexander, 2004).

With an opportunistic approach the decision regarding the market and partner choice is

made relatively quickly with limited or no research undertaken on the market potential or

partner fit (Doherty, 2009). Often potential franchisees approach the franchisor which initiates

foreign market entry. The franchisor decides to enter a particular market mainly because the

partner is there and the decision to follow the partner to that market is based on the immediate

benefits associated with having a partner that provides the majority of the financial resources

(Doherty & Alexander, 2004). Indeed, the franchisor does not apply stringent selection

criteria in order to assess the approaching partner, but focuses mainly on the financial

capability (Altinay et al., 2013). Moreover, with this approach the franchisor insufficiently

researches the foreign market conditions, thereby underestimating the fact that environmental

factors can be major barriers (McIntyre & Huszagh. 1995). Consequently, the possibility for

unsuccessful franchising is with this approach higher as the opportunistic and ad-hoc

decision-making results in that the franchisor is inadequately prepared for the difficulties and

conflicts that could arise (da Silva, da Rocha & Pacheco, 2013). Indeed, franchise agreements

formed through opportunistic approaches generally have a short lifespan (Doherty &

Alexander, 2004) and franchisors typically switch to a strategic approach as they gain

experience and learn from their mistakes of using opportunistic approaches (Doherty, 2007).

In conclusion, a success factor from this stage is to conduct a planned and strategic

search process regarding market and partner selection. The careful evaluation of the market

and the potential partner is a critical step for successful franchising.

2.4. Stage 2: Partner selection

Proper use of selection criteria enables the franchisor to control franchisee behavior

prior to signing the contract and it minimizes the potential risks (Altinay & Miles, 2006).

Hence, it is not surprising that improper partner selection results in increased management

conflicts, slow decision-making process and lack of communication (Vaishnav & Altinay,

2009). Particularly, in the case of international franchising selecting good and reliable

partners is perhaps the most important task in order to achieve success (da Silva et al., 2013).

The selection criteria used have typically been categorized as task-related and partner-related

criteria. Although this typology originates from the JV literature, it has been applied to

franchising (e.g. Doherty, 2009). Partner-related criteria are specific to the character, culture

and history of the franchisor and franchisee, and are concerned with the effectiveness of the

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cooperation between the two (Brookes & Altinay, 2011). Task-related criteria are used in

order to assess whether the potential partner possess the operational skills and resources

necessary to successfully run the local unit (Altinay et al., 2013). Previously emphasized

partner-related criteria are ease of communication and trust (e.g. Doherty & Alexander, 2004;

Das & He, 2006). However, partner-related criteria have more uncertainty as these

characteristics cannot be assessed easily early on; rather these characteristics prove later as the

parties work together. In contrast, task-related criteria which are concerning the skills and

resources that the franchisee possesses are easier to assess and base a decision on, thus the

focus of this thesis is on these selection criteria whereas the partner-related criteria are dealt

with later on in the franchisee management stage. Next, three task-related partner selection

criteria are discussed in more detail.

Financial capability

Considering that one of the main motives behind franchising is access to financial

capital, it is not surprising that the financial capability of the franchisee has been identified as

an important selection criterion (Choo, Mazzarol & Souter, 2007). Particularly in the

beginning of the franchise relationship much is expected financially from the franchisee

whereas it might take some time until positive cash flows occur, hence franchisees that are in

a weak financial position could be tempted to act opportunistically in an attempt to enhance

their profits. Indeed, before any contract is signed the franchisee should have demonstrated

his willingness and ability to meet the financial requirements of the franchise relationship

(Jambulingam & Nevin, 1999). Particularly in emerging markets the question of financial

resources plays an important role. This is because such countries are characterized by poorly

developed financial markets and weak institutions for distribution of capital resulting in that

financial capital generally has low availability (Hitt, Dacin, Levitas, Arregle & Borza, 2000).

For the franchise relationship that is dependent upon the franchisee’s financial investments to

the relationship, it is very important for the franchisor to ensure that the potential franchisee

has the necessary funds to make the initial but also on-going financial contributions.

Local market knowledge

Local market knowledge is a critical resource for successful local unit operations that

the franchisor does not possess and thus the franchisor places great value on it when selecting

franchisees (Combs & Castrogiovanni, 1994). Indeed, franchisees perceive their local market

knowledge as their key contribution to the relationship (Altinay & Brookes, 2012).

Particularly, in the case of emerging markets this is an important selection criterion due to the

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cultural and physical distance (Hitt et al., 2000). It has been emphasized in the literature that

local market knowledge is required in order be able to make the appropriate adaptations to the

franchise concept in an attempt to gain market acceptance (Choo, Mazzarol & Soutar, 2007).

However, even in the case that the franchise concept requires limited adaptation because the

product or service is generic, culturally distant countries often have very different perceptions

of what accepted business practices are (Vaishnav & Altinay, 2009). And those differences

are deemed to affect all franchisors. Thus, regardless of whether the franchise concept

requires adaptation, the local operations will be affected by the local business practices.

Moreover, local market knowledge can also include knowledge and access to distribution

channels, government officials and potential customers as well as knowledge regarding the

key players in the industry such as potential suppliers and competitors.

Managerial capability

The managerial capability of the potential franchisee’s management team is a key factor

that to a large extent determines the franchisee’s ability of operating the local franchise unit;

hence franchisors closely assess potential franchisees regarding their managerial capabilities

(Altinay, 2006). Through franchising the local franchisees gain access to a proven business

format thus they are not required to build the business from scratch, however, in order for the

brand to be a success in the foreign market the local franchisee’s team must possess strong

managerial capabilities (Choo et al., 2007). Indeed, the franchisee will not able to exploit the

advantages of entering a franchise agreement if his team lacks adequate managerial

capabilities (Dev et al., 2002). Running the local franchise unit requires the franchisee to

comply with strict policies and high standards set by the franchisor that comes from a

developed market and has more experience. Hence, this implies that the demands placed upon

the managerial capabilities of the franchisee’s team are high. An indication of the

management capability is the business experience and reputation of the franchisee. A positive

reputation and more business experience would imply that the franchisee is better prepared

and more capable of running the local unit (Jambulingam & Nevin, 1999).

2.5. Stage 3: Contracting

The content of the contract can be specified such that it controls franchisee opportunism

and protects the intellectual property of the franchisor. However, the franchisor is also

required to adapt to the local legal system. Thus, next both the content of the contract and the

adaptation to the local legal system will be discussed.

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2.5.1. Content of the contract

Typically the franchisor does not permit negotiation on the contract terms and thus does

not custom-tailor terms to particular franchisees, rather the terms are part of the package

offered by the franchisor and the franchisee can ‘’take it or leave it‘’ (Boulay, 2010). The

franchisor safeguards his interests by designing relatively complete and one-sided contracts

which specify the franchisee’s obligations before, during and after the relationship (Antia,

Zheng & Frazier, 2013) and which restrict the franchisee’s range of freedom (Kashyap, Antia

& Frazier, 2012). Thus, complete contracts are important, and next several frequently used

contract terms and terms focused on protection of intellectual property will be discussed.

Complete and detailed contract

There are several core contract terms which specify the franchisee’s obligations and

restrict his behavior. Firstly, the contract includes a territorial clause which stipulates the

territory in which the franchisee can operate. This limits the scope of the local operations and

thus prohibits the franchisee from operating in other areas in which the franchisee would be

competing with other franchisees or other units of the franchisor. The geographical area can

be an entire country, or a specified territory within the country (Wright & Relf, 2005).

Secondly, the contract includes quality standards clauses which stipulate the standards

regarding product quality but also production and delivery of the product (Michael, 2000).

Typically, the franchisor sets minimum quality standards and regularly checks whether

franchisees uphold to it and the franchisor imposes penalties on deviations (Lal, 1990).

Moreover, some contracts allow for co-branding implying that the products in the local

market are labelled with both the brand name of the franchisee and the franchisor (Erevelles,

Stevenson, Srinivasan & Fukawa, 2008). This is because it is not uncommon for local

franchisees to have an established brand name in the local market and it often takes decades

for the franchisees to establish it, thus it is a source of pride and a sense of identity. Hence,

franchisees attach great value to the ability of being able to maintain their brand (Brookes &

Altinay, 2011). With co-branding the franchisees has an incentive to uphold to the set quality

standards as their reputation is also at stake. Thirdly, the contract sets out the investment

requirements and fees payable by the franchisee. The investments made by the franchisee

early on serve as a signal of the franchisee’s management capabilities (Shane, 1998). If the

franchisee is willing to invest a substantial amount, it is a sign that he has the capabilities to

run the local franchise unit because the return on his investment is dependent on his ability to

generate revenues (Sashi & Karuppur, 2002). The franchisee must pay an initial start-up fee

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and on-going royalty payment which generally is a fixed percentage of the local unit sales that

on average is 7% (International Franchise Association, 2006). Typically the franchisor has the

right to revoke the franchise agreement without returning the franchisee his start-up fee in

case the franchisee does not adhere to his contractual obligations. The presence of this risk

makes it less likely that the franchisee will purposely harm the quality (Norton, 1988). Lastly,

in the contract the duration of the agreement is set. The franchisees are required to make

substantial relationship-specific investments and they are typically unwilling to make such a

commitment unless they are offered a long-term franchise agreement that protects them

against hold-up and provides them with the opportunity to earn positive returns (Brickley,

Misra & Van Horn, 2006). Indeed, long-term contracts of up to twenty years lower the

franchisee’s incentives to shirk (Brown & Dev, 1997; Shane, 1998).

Protection of intellectual property

The franchisor can take three important measures to protect his intellectual property

against infringements from third parties and franchisee opportunism. Firstly, when entering

foreign markets the chances are that the franchisor’s intellectual property registrations do not

extend to those countries (Wright & Relft, 2005). Particularly, in emerging markets the

copying of intellectual property may not be considered as unethical. Thus, the franchisor

should ensure that the relevant trade names, logos, domain names and marks are registered in

the target country, and as in some countries registrations may take a substantial amount of

time so it is important for the franchisor to do this early in the process (Pengilley, 1985). In

fact, in some countries the franchisor is obligated to register with the patent and trademark

office of that country prior to operating (DLA Piper, 2009). Secondly, the franchisor also

provides the franchisee with confidential know-how and trade secrets that are not publicly

known and thus cannot be registered. One way a franchisor can protect it is to include a strong

confidentiality clause in the contract. Essentially, such clauses compel the franchisee (and

sometimes also its employees) to keep franchisor’s trade secrets and know-how confidential

both during and after the franchise relationship (Sotos, 2010). Generally, confidentiality

clauses are enforceable and in for instance Malaysia the franchisee is even obliged to provide

the franchisor with a written guarantee that the franchisee and its employees shall not disclose

any confidential information (Zeidman, 2014). What makes confidentially clauses particularly

important is that they typically last for an indefinite period (Sotos, 2011). Lastly, the

franchisee gains access to the franchisor’s know-how and trade secrets which the franchisee

can use to compete with the franchisor. To prevent that, franchisors use non-compete clauses.

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A non-compete clause can be effective during the franchise relationship (in-term) and/or after

termination of the relationship (out-term). Generally, non-compete clauses must include

reasonable limitations to the time, geographic area, and scope of activity restricted in order for

it to be enforceable as using vague terms or applying too broad scopes might add difficulties

to the enforceability (Levitt, Tyre & Ward, 2010). In Moldova and Malaysia the franchisee is

prohibited from competing with the franchisor in the local market for a period ranging from

one to two years (Sotos, 2011), whereas in Thailand the period can last up to two to five years

and the restriction might even include areas outside Thailand (Zeidman, 2014). However, in

some countries non-compete clauses are seen as harmful to the franchisees and hence

restrictions are placed upon the franchisor’s ability to use such clauses. For instance Chilean

law allows for in-term non-compete clauses, but post-term are prohibited and can only occur

if the franchisee is compensated (Zeidman, 2014).

2.5.2. Adaptation to local legal system

The way that the local legal system influences franchising varies across countries.

Twenty-nine different countries have franchise-specific laws (Abell, 2010); these are

developed countries (e.g. the US, Australia) but also emerging markets (e.g. Malaysia,

Indonesia). However, this does not imply that the other countries do not have laws affecting

franchising. Indeed, in every country there are laws that are of general applicability and which

also affect the franchise relationship such as trademark laws and anti-trust regulations (Abell,

2010). Regardless of whether there are franchise-specific laws, these generally applicable

laws will also be used with regard to the franchise agreement. It must be noted that overall

there has been an improvement in the international legal climate concerning franchising in the

past decade (Welch, Benito & Petersen, 2007). Nonetheless, the lack of a common approach

to franchising creates real challenges for international companies wishing to enter foreign

markets by means of franchising (Abell, 2010). In this section the two common ways in which

franchising is regulated (pre-contractual disclosure and relationship laws) will be discussed,

after which the choice of governing law will be discussed.

Pre-contractual disclosure

Pre-contractual disclosure requires the franchisor to provide a potential franchisee with

a full overview of the franchise system including financial information, the franchise contract

and other matters that are necessary for the potential franchisee to make an informed decision

(Sotos, 2011). The franchisor should provide the potential franchisee with a pre-contractual

disclosure document at least 30 days prior to contract signing in China and 14 days in South

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Africa, thus it varies across countries (Zeidman, 2014). This requirement should not be taken

lightly as it has been the cause of substantial conflicts and has led to many court cases

(Lapiedra, Palau & Reig, 2012). Moreover, some countries (e.g. Vietnam) require the

franchisor to update the disclosure document in case any changes are made to the franchise

system and those updates have to be registered within a given time period, otherwise penalties

apply (Zeidman, 2014). Furthermore, many countries require the franchisor to register the

franchise business with various governmental officials prior to franchising (Spencer, 2010).

Franchisors may be required to register with government ministries, central banks and/or

specific franchisors’ registries, and registration may concern only the disclosure document but

sometimes also the franchise manual or financial documents (DLA Piper, 2009). Also, in

some countries the franchisor cannot recruit franchisees without having set up a number of

own operations prior to that. In China the franchisor must have had two company-owned units

for at least a year, whereas in Vietnam the franchise system must have been operating at least

one year prior but there are no specifications on the number of units (DLA Piper, 2009).

Relationship laws

Although pre-contractual disclosure regulations dominate the global franchise

regulatory landscape, there has been an increase in the use of relationship laws (Sotos, 2011).

The main purpose of it is to protect the franchisee after the agreement has been signed by

restricting the franchisor’s freedom. Some countries require a cooling-off period after the

contract is signed during which the franchisee has the right to end the franchise agreement and

the franchisor is obliged to, after deducing reasonable expenses, return the fees paid by the

franchisee (Spender, 2010). The cooling-off period can range from 30 days in Mexico to 5 in

Taiwan (Abell, 2010). Moreover, relationship laws can stipulate the minimum term that a

franchise contract must last which is in China 3 years and in Malaysia 5 years (DLA Piper,

2009). Importantly, relationship laws often require the franchisor to have ‘good cause’ for

terminating the contract (Antia et al., 2013). However, an obvious problem is that the

interpretation of what exactly is a ‘good cause’ can differ (Pitegoff, 1989). Although good

causes for termination in most countries include a franchisee’s repeated failure to comply with

the provisions of the agreement (Levitt et al., 2010), it still represents a challenging issue for

franchisors. Moreover, countries such as Malaysia and Vietnam do not allow for immediate

termination even in the case of ‘good cause’ and have procedural requirements such as a

written notice and opportunity for the franchisee to cure the default (Sotos, 2011).

Relationship laws also restrict the franchisor’s ability to refuse to renew a contract. While the

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majority of the countries have left renewal decisions to the discretion of the parties in the

franchise agreement (Sotos, 2011), some have strict restrictions on it. For instance, in Russia

and Lithuania if the franchisor refuses to renew the contract of a franchisee that has not been

in breach then the franchisor cannot open another franchise in that same territory for 3 years,

whereas in Malaysia if the franchisor refuses to renew the contract he is then obliged to

compensate the franchisee (DLA Piper, 2009).

Choice of governing law

In the contract the choice of governing law is indicated. This is a critical decision as

contracts with the same clauses can result in very different dispute resolution outcomes due to

the application of a different law (Tractenberg & Dovi, 2010). Sometimes the franchisor can

negotiate with the franchisee to choose a foreign law as the governing law and a foreign court

or arbitration to resolve disputes (Zeidman, 2014). However, some countries require that their

own law applies either in whole or in respect to certain fundamental issues, regardless of the

contractual choice of law (Pitegoff, 2002). Moreover, even though some countries allow the

contract to include the choice of law, the question remains whether the dispute resolution

outcomes will be recognized. For instance Indian law allows for disputes to be settled by

foreign court or arbitration under foreign law, but Indian courts are not obliged to recognize

orders passed by foreign arbitral tribunals or foreign courts (Sharma, 2013).

In conclusion, complete and detailed contracts help reduce franchisee opportunism and

protect intellectual property, but the local legal system can influence this. Considering that

countries still vary significantly in the manner in which franchising is regulated and some of

the laws can impose heavy burdens on franchisors, it is important for franchisors to be very

careful in the evaluation of the foreign markets (Abell, 2010). Awareness and compliance

with the local legal systems is required, and critical decision making concerning the choice of

governing law is important.

2.6. Stage 4: Franchisee management

Franchising involves a complex relationship in which conflicts are inevitable (Fulop &

Forward, 1997). Particularly, in emerging markets there are greater challenges in the

management of the relationship (Welsh et al., 2006). Typically the power in the franchise

relationship is asymmetric in favor of the franchisor, although it must be noted that how much

power the franchisor has depends on how much counter-power the franchisee has as he also

has resources that provide him with power. Nonetheless, the franchisor’s power determines

his ability to influence the franchisee’s behavior and can be a way for the franchisor to

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achieve his desired goals (Frazer, Merrilees & Wright, 2007). According to Quinn (1999) the

franchisor can rely on coercive and non-coercive sources of power to control.

2.6.1. Coercive control

The main characteristic of coercive sources of power is that it involves potential

punishment and negative sanctions by the franchisor (Frazer et al., 2007). Central to coercive

control is the franchise contract and the monitoring systems applied by the franchisor (Quinn

& Doherty, 2000). The franchise contract specifies the desired franchisee actions and the

monitoring systems enable the franchisor to check whether the franchisee fulfills his

obligations in a desirable manner.

Contract

The contract provides the franchisee with an indication of what the desirable behavior is

and it limits the franchisee’s freedom of action (Kashyap, Antia & Frazier, 2012). Moreover,

it can reduce franchisee opportunism as it gives the franchisor the right to terminate the

agreement if the franchisee fails to adhere to the terms of the agreement (Quinn, 1999).

However, in international markets it can be time and money consuming for the franchisor to

go to court regarding contract breaches, hence franchisors rely more on other methods to press

for compliance in the day-to-day management of international franchise relationships

(Schmidt & Mazero, 2008). Moreover, emphasis on the contract and threat of punishment in

case of non-compliance contributes to the development of conflicts within the relationship

(Tikoo, 2005). Hence, the contract cannot be used to control the franchisees’ day-to-day

behavior and it is generally only used in case of serious breaches (Watson & Johnson, 2010).

Monitoring

Adequate monitoring capabilities are essential in preventing franchisee opportunism,

because a franchisee’s tendency to act opportunistically will be reduced if the chance of

getting caught is higher (Shane, 1996). The franchisor’s ability to adequately monitor

franchisee behavior is determined by the franchisor’s willingness and ability to devote a

sufficient amount of resources towards monitoring (Shane, 1996). The added difficulties from

increased distance can be mitigated by usage of technology and telecommunications as these

make it easier for the franchisor to monitor the franchisee over long-distance (Hoffman &

Preble, 2004). However, in practice monitoring can prove to be an inefficient way of

managing franchisee behavior. This is because it can be financially impossible, franchisees

may not be willing to provide reports regarding their operations on a regular basis and it can

be perceived as a sign of mistrust by the franchisees (Quinn, 1999).

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2.6.2. Non-coercive control

Non-coercive control is concerning the franchisor’s support activities and the focus is

on management by persuasion rather than on threat as with coercive control (Quinn &

Doherty, 2000). Thus, the aim is not to force the franchisee to behave in a certain way, rather

the purpose is to persuade and influence the franchisee in such that he willingly behaves in

that way. The key characteristic of non-coercive sources of power is that it involves a

willingness from the franchisee to yield power to the franchisor. Subsequently, several aspects

will be discussed that legitimize the franchisor’s efforts to gain power and thus help to get the

franchisee to give power willingly to the franchisor (Hunt & Nevin, 1974).

Communication

For the day-to-day management of the franchise relationship ongoing and continuous

communication plays a crucial role (Doherty & Alexander, 2004). Communication is

necessary for information to flow between the franchisor and franchisee which enables the

sharing of ideas and it helps to identify and reduce conflicts (Chiou, Hsieh & Yang, 2004).

Importantly, communication helps to build a good relationship which makes the franchisees

more willing to listen to suggestions from the franchisor (Doherty & Alexander, 2006). It is

important is that there is regular personal contact including visits to the local market. Indeed,

insufficient personal contact negatively affects the ability of the franchisor to monitor and

coordinate franchisee behavior (Quinn, 1999). Moreover, communication has to be a two-way

interaction in which the franchisor is open to feedback and suggestions by the franchisee

(Chiou et al., 2004). The franchisor should act upon feedback received from the franchisees

regarding local difficulties, because if the franchisee feels that the feedback is ignored then he

may stop informing the franchisor of it which can have consequences (Levitt et al., 2010).

However, in practice it is not uncommon for franchisors to underestimate the importance of a

having a two-way communication (Levitt et al., 2010).

Trust

The franchise relationship is characterized by power asymmetry yet it requires a lot of

mutual cooperation between the franchisor and franchisee, hence the establishment of trust

between the two parties is necessary for successful franchising (Lee, Khan & Ko, 2010).

Importantly, trust is crucial for the franchisor to be able to control franchisee behavior

(Doherty & Alexander, 2006). The franchisor as the authority figure in the relationship sets

out the terms of how the operations should be run and to which standards the franchisee

should uphold to. However, the franchisee has to trust that the franchisor knows what is best

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for the franchise business otherwise the franchisee will not run the operations according to the

wishes of the franchisor. Indeed, trust is an important predictor of franchisee compliance to

the norms set by the franchisor (Davies, Lassar, Manolis, Prince & Winsor, 2011) as it

induces franchisees to faithfully and voluntarily follow the standards set by the franchisor.

Also, trust induces the parties to engage in constructive dialogues and cooperative problem

solving which enables difficulties to be resolved (Watson & Johnson, 2010). This is

particularly important in international franchising as conflicts can arise due to the physical

and cultural distance, which without trust could seriously hamper the relationship.

Training & support

The franchisee is highly dependent upon the franchisor for information and

understanding of how to apply the knowledge required for running the local operations

(Mendelsohn, 1992). The franchisor provides this help by means of training and support

Firstly, training consists of initial training at the local unit with the aim to equip the franchisee

with the necessary knowledge on how to set-up of the local operations, and ongoing training

which is regular on-site training, and assistance from the franchisor throughout the

relationship with the aim to update the franchisee’s knowledge about the business (Hing,

1995). Franchisor’s ability to provide adequate training is important for franchisee satisfaction

and commitment (Chiou et al., 2004) which is necessary in order to increase the franchisee’s

willingness to follow the franchisor’s instructions. Moreover, training plays a crucial role in

ensuring that the brand standards are maintained as it is a means for the franchisor to assist the

franchisee on how to operate in line with the franchisor’s standards and guidelines (Altinay &

Miles, 2006). Indeed, training is an important tool to control franchisee behavior and

emphasize brand quality (Doherty, 2007). Training is particularly important with franchisees

from emerging markets, because their prior learning experiences differ to that of the

franchisor as it is specific to the local context in which it was obtained. Thus, their absorptive

capacity or their ability to recognize, assimilate and apply the new knowledge that the

franchisor is transferring is not well-developed. Hence, franchisees from emerging markets

need help from the franchisor to develop an adequate absorptive capacity (Hitt et al., 2000)

which requires face-to-face training, mentoring and site visits that allow the franchisees to

learn the knowledge first-hand and gain the necessary experiences. Secondly, the franchisor

also provides support to the franchisees. The aim with support is not to transfer knowledge or

teach how to apply the knowledge as is with training, rather the purpose is to help and assist

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the franchisee in decision-making. Examples are support with human resource management,

marketing and other functional areas involved in running the local unit (Hing, 1995).

In conclusion, although both elements of coercive control have its strengths, in practice

it may not the best way to effectively manage the franchisee. Also, the danger of coercive

control is that it can give rise to retaliation (Frazier & Summers, 1986). Hence, franchisors

typically place more attention on non-coercive control as a way to manage the franchisee’s

day-to-day behavior (Doherty & Alexander, 2006).

2.7. Overview success factors

The figure below illustrates the success factors at each stage of international franchising

as identified through the literature review.

FIGURE 2:

Overview success factors

The existing literature on franchising has enabled the development of this overview of

possible success factors. But as indicated the existing literature is predominately based on

research conducted in a B2C context (e.g. retail, hotel industry), domestic franchising and

franchising in developed markets. The belief is that B2B franchising differs from B2C

franchising due to the distinction in customer group. For B2B franchisors the client group is

much smaller, and these are professional clients making a rational decision to cooperate thus

B2B franchisors can rely less on brand loyalty and impulsive buying and must focus more on

the relationship with the client for repeat purchases. Thus, the success factors based on B2C

industries could be less applicable to B2B franchisors or certain factors may be emphasized

• Strategic approach

Search

• Selection criteria

∗ Financial capability ∗ Managerial capability ∗ Local market knowledge

Partner

selection

• Content of contract ● Adaptation to local legal system

∗ Complete & detailed contract ∗ Compliance with local legal system ∗ Protection of intellectual property ∗ Chocie of governing law

Contracting

• Coercive control ● Non-coerceive control

∗ Monitoring ∗ Trust

∗ Contract ∗ Communication ∗ Training & support

Franchsiee

management

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more in a B2B context. For instance partner selection might be more crucial as the

franchisee’s relationship and interaction with the client is fundamental for future orders.

Moreover, the belief is that franchising in an emerging markets context differs from

franchising domestically and in developed markets. This particularly because the concept

franchising is new in these countries and also due to the institutional voids and weak

mechanisms for contract enforceability different success factors could apply. For instance

franchisees might require more training as they are unfamiliar with franchising but also

franchisors could face difficulties with monitoring due to the increased physical and cultural

distance, but also due to underdeveloped infrastructures. Hence, research specific to the

context of B2B franchising and emerging markets is necessary to research to what extent the

identified success factors are applicable in those contexts. Thus, subsequently the

methodology employed to answer the research question that is specific to these two contexts

is discussed.

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3. METHODOLOGY

This section focuses on the methodology applied to gather the data necessary to answer

the research questions. Firstly, the research process of Saunders et al. (2007) will be applied

in order to ensure that all the relevant aspects of the research are discussed. Secondly, the case

selection will be explained. Thirdly, the data collection procedure will be discussed in more

detail. Lastly, the data analysis procedure and the research quality will be elaborated on.

3.1. The research process ‘onion’

In their book Saunders et al. (2007) display the research process in the form of an

‘onion’ consisting of different layers, and with each layer the researcher makes a choice

concerning the methodology employed. The figure below displays the different layers and the

choices made at each layer. Subsequently each layer and the corresponding choice will be

explained, except for the last layer (data collection) which will be discussed in more detail

later on in order to ensure that sufficient elaboration is given on how the data were obtained.

FIGURE 3:

Application of the research process ‘onion’

Source: Adapted from Saunders et al. (2007)

Research approach

The research conducted follows an explorative approach that allows one to find out

’what is happening; to seek new insights; to ask questions and to assess phenomena in a new

light’ (Robson, 2002: 59). This is the most suitable approach to this research because

international B2B franchising in emerging markets is a relatively under researched

phenomenon that requires a better understanding. The focus of this research has been to

contribute to the understanding of it by exploring what the success factors of international

B2B franchising in emerging markets are. Moreover, the research conducted is mainly of

qualitative nature which is common with explorative research approaches (Blumberg, Cooper

& Schindler, 2011). Qualitative research is more appropriate for this thesis as it enables the

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researcher to gain in-depth information that may be difficult to convey quantitatively (Strauss

& Corbin, 1990). Quantitative data can be interesting and valuable which is the reason why

some quantitative data are collected for this research, as will be explained later. But, as Quinn

(1999) has argued the depth of information needed to provide a full understanding of the

process of franchise internationalization cannot be achieved solely by quantitative data.

Hence, qualitative data collection has been the main focus of this research. Qualitative data

enable the researcher to explore the phenomenon in as real a manner as is possible (Robson,

2002) and allows the researcher to gain a comprehensive understanding of the research topic.

Research strategy

The strategy employed in this research is the case study strategy. A case study can be

best defined as a research strategy that involves the investigation of a particular contemporary

phenomenon within its real life context using multiple sources of evidence (Robson, 2002).

This definition is closely related to Yin’s (2009) three conditions for a case study which when

applied to this research show that this strategy is the most appropriate. This is because the

central research question of this thesis is an explorative type of ‘’what’’ question, and the

focus is on contemporary events over which the researcher has little or no control. Also, a

case study strategy is often applied when a phenomenon is not well understood yet (Blumberg

et al., 2011), which as explained previously fits to this research topic. Moreover, the case

study strategy fits to the research approach taken as this strategy is the most appropriate when

the researcher wishes to explore a phenomenon and its context and gain a rich understanding

of it (Saunders et al., 2007). Investigating more than one case is usually preferable because

the results are then based on multiple cases and thus can be considered as more robust

(Blumberg et al., 2011) and more compelling (Yin, 2009), because multiple cases allow the

researcher to establish whether the findings of one case also occur in other cases as well

(Saunders et al., 2007). Hence, for this thesis the decision was made to conduct a multiple

case study in which several cases are researched rather than just a single case. The logic that

will be followed is that of replication whereby cases are selected that will predict similar

results and whereby the researcher will be able to draw a single set of ‘cross-case’ conclusions

(Yin, 2009). The objective of the research is to at the end of the study develop theory

concerning the research topic (Eisenhardt, 1989).

Research choice & time horizon

For this research the multiple methods choice has been employed which means that

more than one data collection technique and corresponding analysis procedure are used to

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answer the research questions (Saunders et al., 2007). This research relies on both qualitative

techniques in form of semi-structured interviews as well as quantitative techniques in form of

online questionnaire. Next to these two techniques that are part of primary data collection, this

research also relies on secondary data in the form of a literature review. The time horizon of

this research is cross-sectional as it studies a particular phenomenon at a particular time

(Saunders et al., 2007).

3.2. Case selection

With a case study strategy the cases are selected based on unique qualities, thus the

sampling is for theoretical and not statistical reasons (Eisenhardt, 1989).

For this research the case companies were selected on four criteria. Firstly, ideally the

case companies are business-to-business (B2B) operators. Secondly, within the B2B industry,

business service franchising is a dominant form (e.g. tax services, recruitment services).

However, after a discussion with experts on franchising it became apparent that business

service franchising may be less applicable because with business service franchising generally

the investment requirements for the franchisee are significantly less as there is no physical

product, and often the franchisees do not have a physical business premise as it is often the

case that they have a van which they use to go clients or they work from home. Hence, ideally

the selected case companies are those that provide their clients with physical products.

Thirdly, the selected case companies are those that have entered emerging markets through

franchising. Thus, ideally the selected case companies would be B2B operators that provide

their clients with physical products and that have used franchising to enter emerging markets.

Ideally the companies should be comparable in terms of size and internationalization history.

In order to identify companies that fit those criteria, the researcher used internet

searches and franchising websites that list the top most successful franchise concepts

1

. From

those websites the researcher was able to identify a few B2B franchisors active in emerging

markets. After making a list of companies that fit the criteria, the researcher scheduled a

meeting with the Dutch Franchise Association (hereon after NFV) to discuss possible case

companies that fit the criteria. The NFV confirmed that the combination of B2B franchising

and emerging markets is not very common, but it was able to identify a few more companies.

Overall, 6 companies were identified that fit the criteria

2

. However, as these are all large

American and Australian companies, gaining access proved to be difficult and no response

was obtained on the e-mails sent. For this reason a second approach was taken whereby the

1_{Entrepeneur.com, Franchisedirect.com and Franchise.org}

2_{Embroid-Me, Fastsigns, Pirtek, Sign-a-Rama, Snap-on Tools and Swisher Hygiene.}

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selection criteria were slightly adjusted in order to increase the response rate. The decision

was made to select two B2B franchisors operating anywhere in the world, and two B2C

franchisors operating in emerging markets. This would bring the number of cases selected to

four which is in the range of four to ten cases as suggested by Eisenhardt (1989). With such

an approach both the criteria are met and thus information regarding B2B franchising as well

as emerging markets could be obtained. This approach resulted in the identification of four

possible case companies. The case selection is made based on the internet searches and the

interview with the NFV. The researcher contacted each company via e-mail. Ultimately, one

B2B company did not respond, resulting in that three case companies were selected. These

case companies are listed in table 1 below. The companies are relatively diverse in terms of

their industry, size and the countries active as can be seen in the table. For reasons of

confidentiality, participating companies are anonymized.

Table 1:

Selected case companies

Furthermore, as the NFV has shown great knowledge regarding franchising in the

Netherlands the belief was that the Franchise Associations of emerging markets could

probably also give an insight in the factors influencing market entry of foreign franchisors.

Thus, Franchise Associations in emerging markets were contacted in order to obtain more

information on how foreign franchisors enter their markets. There are a few organizations

where multiple Franchise Associations are members such as the World Franchise Council

3

,

the Pan African Franchise Federation

4

, the Asia Pacific Franchise Confederation

5

and the

3_{www.worldfranchisecouncil.net}

4

franchisefederationafrica.org

Company Industry

Employe

Success factors of entering emerging markets through international B2B franchising