Franchising: U.S. Businesses Go Abroad

Abstract

The process of expanding a successful business by selling the rights to the name and system of that business, commonly known as franchising, is quickly becoming the most widely used method of expansion. Franchising began in the United States following the Second World War, and was originally used to create the chains of fast food operations that today dot the countryside. Small, successful businesses wishing to expand but lacking the capital to do so, improvised a solution to their problem. By selling the rights to their unique business systems and names, these companies, in return for a flat fee and royalty payments, gave individuals seeking to own their own operations a proven business system along with a recognizable name. A variety of methods have been used by franchisors to expand their franchises. Many sell a franchise unit in return for a fee and royalties, others are joint-partners, and still others employ "conversion franchising." No matter which method is chosen, statistics show that a new franchise has a much greater chance of success than a new, unique business. Franchises have the advantage over other operations due to a variety a factors. The key points, however, are name recognition and the support system inherent in any good franchise. Successful franchisors train their franchisees to efficiently operate their stores, preparing them for many of the problems which will arise based on their own experiences and those of other franchisees. A single unit operator does not have this advantage. He or she enters into the market less prepared than a franchisor. U.S. franchisors have not been content with just working within our nation's borders. Many have expanded their operations overseas, mostly to other industrialized nations, but to the Third World as well. Foreign markets are seen as ripe for U.S. franchises seeking to increase their revenue and reputations. Crossing borders has not always been easy, especially in developing nations. Many countries do not have laws which protect trade names and trademarks, while others have strict laws regarding the extent to which a franchisor can maintain his presence in their country. Most governments do not like the idea of U.S. franchises operating within their nations because of royalty payments. While welcoming foreign investment, they do not encourage the outflow of much needed currency. In Asia, established franchises have encountered situations similar to what they experienced in the United States, have had their ideas blatantly copied after being welcomed with open arms, and have had to restrict their operations in other cases due to government regulations. Despite a myriad of problems, U.S. franchisors, especially in the fast food industry, have been very successful. In Eastern Europe and the Soviet Union, there are thousands of people with the desire to own their own business but with no idea of how to go about doing so nor what to do if and when they achieve their goal. These markets are perfect for U.S. franchisors who can train such people in the Western style of doing business and then sell them their own units. The total population represents an immense market. Franchising is a concept that will continue to grow all over the world. The U.S. is not the only country that has its own franchisors. All of these businesses are seeking to expand their operations, and if the trend is followed, most will be successful. The Asian market has barely been tapped, and Eastern Europe and the Soviet Union have opened their doors to franchising in the hopes that it will increase the prosperity of the region.