Can franchising be an economic development strategy?
An empirical investigation
Steven C. Michael
Accepted: 23 July 2013 / Published online: 11 August 2013
Ó Springer Science+Business Media New York 2013
Abstract Prior research has examined why franchi-
sors expand abroad, but no paper has empirically
examined the role of franchising in the macroeconomy
of developing nations. In this paper, the pattern of
franchising development is statistically analyzed
within the context of the general economic develop-
ment of Latin America. It is found that franchising
leads, rather than follows, economic development.
Implications for theory and policy are considered.
Keywords Franchising Á Economic
development Á Organizational form Á
Competition Á International business
JEL Classiﬁcation L26
Since the publication of the Wealth of Nations by
Adam Smith over 200 years ago, prescriptions for the
path of economic development have been a signiﬁcant
part of applied social science, economics, and busi-
ness. Examining the role of small business and
entrepreneurship on development has become an
important part of this research agenda (e.g., Baumol
et al. 2007; Brock and Evans 1986; Carree et al. 2002,
2007; van Stel et al. 2005). One unexamined suspect in
this search is the organizational form of franchising.
Franchising is an organizational form chosen by both
franchisors and franchisees in order to compete
successfully in an industry, typically in retail trade
and services. The franchisor, the owner of a trademark
and a production technology, grants to the franchisee,
typically a local entrepreneur, the right to use the
trademark and the technology in a site of the
franchisee’s choosing, for which the franchisor
receives compensation in the form of a lump sum fee
(termed the franchise fee) and a royalty on sales. As a
practical matter, franchising is a large and growing
force in the world economy. The modern form of
franchising described above, business format fran-
chising, was developed in the United States in the
postwar period by several services entrepreneurs
including Ray Kroc of McDonald’s, Kemmons Wilson
of Holiday Inn, and the Bloch brothers of H&R Block
(Dicke 1992; Love 1986; Shook and Shook 1993).
Franchising percolated beyond North America and the
UK in the late 1980s and is now experiencing high
growth (Preble 1995; Welsh et al. 2006). The
existence of 1 million franchisees across at least 40
nations has been documented (Arthur Andersen 1996).
And franchising is a signiﬁcant and positive contrib-
utor to the US balance of payments, with high and
growing levels of export (Hoy et al. 2000; Welsh et al.
S. C. Michael (&)
College of Business, University of Illinois Urbana
Champaign, 1206 S. Sixth St., Champaign, IL 61820,
Small Bus Econ (2014) 42:611–620