Franchising Pros And Cons

Businesses in developing nations are taking new forms with the increase in Foreign Direct Investment through franchising. As the global competition gets intense and the domestic companies that dominate the local market face difficulty with foreign competitors, they seek to enter new markets through franchising. According to Khan (1992) Franchising is a contact between franchisor and franchisee where franchisor agree to let the franchisee use its brand name and sell its products and services. Franchising can be seen as an important strategy for economic development all over the world (Hoffman and Preble, 1991). It also offers opportunities for businesses who want to expand their products and services abroad.

A major section of the distribution

Price (1997, p.3) has listed several business relationships that have been labeled as ‘franchising’ by various authors. Some examples he refers to are the following: the broadcasting of television programs within certain territories, the operation of airline and railway routes and the use of cartoon characters on products. Price argues that in actual fact franchising does not exist in so many forms, but that the term ‘franchising’ is often applied incorrectly to express what is mostly described as a licensing agreement. The various applications of the term ‘franchising’ require a clear categorization of franchising forms. Kneppers-Heijnert (1988) distinguishes three forms of franchising:

1) ‘Product-distribution franchising’

In this form, the ‘franchisor’ grants the ‘franchisee’ the right to sell specific goods by using the name of the franchisor. In the Netherlands this is not called ‘franchising’ because it is actually a form of licensing. In the U.S. it is often referred to as ‘first generation franchising’. According to Kneppers-Heijnert, the most important characteristics of this form are:

• The products are licensed or

This format reflects a certain identity toward customers. In the Netherlands, the use of the term ‘franchising’ is restricted to this type of cooperation. In the U.S. it is called ‘second generation franchising’. Some of the earliest business format franchise systems in the U.S. are Holiday Inn, Mc Donald’s and Kentucky Fried Chicken, which started franchising in the early and mid-fifties.

Pizza Hut is also a business format franchising. Franchising relationships offer numerous advantages apart from just cost reduction and risk management (Vaughn, 1979). A franchising normally assumes the cost of operating and the risks associated with it which ultimately provides a good incentive for the franchisee to build a profitable operation as quickly as possible (Barkoff et al., 2008). In a franchising relationship, the franchisor normally retains the right of final approval of franchisee selection and site location and franchise fees, royalties and other such payments are set out in the agreement itself with clauses divided between the franchisor and the agent responsible for development in an appropriate manner which is set out clearly in the contractual agreement (Helgerson,