International Franchising

Modern franchising can perhaps best be thought of as a method of organization that combines large and small businesses into a single administrative unit. In a franchise system one large firm, often called the parent company, grants or sells the right to distribute its products or use its trade name and processes to a number of smaller firms2. The use of contracts in franchising also varies from the standard approaches used in domestic operations. Because of the importance of consistency across outlets (both franchised and corporate-owned), the primary research focus of franchising has been on understanding how best to ensure that the franchisee delivers the business format service as specified by the franchisor. Typically, it is believed that this can be achieved through well-designed contract mechanisms such as fees and royalties. However, contracts become more difficult to monitor and enforce in the international environment as a result of time and distance3. The use of standard contracts that is common in the domestic setting is less common internationally where contracts are usually modified for host country laws and cultural differences. Even the use of a contract often takes on a different meaning in the diverse cultural and legal environments of international business4. (Table 1). Finally, the importance of the foreign franchisee to overall operations relative to that of most individual domestic franchisees is often greater as well. First, in international franchising, foreign franchisees are often major multinational firms rather than small, independent entrepreneurs. This may be a result of greater awareness by the larger host country firms regarding the franchisor’s business concept5. Such firms also are attractive franchisees due to their strong financial position and longevity in business making them less ‘risky’ partners in an unfamiliar business environment. In Japan, Burger King’s franchise partner is Japan Tobacco, one ofJapan’s largest firms and reflects JT’s efforts to diversify its business portfolio.