How do international franchisors cluster?

While not an American idea by origin, franchising as a method of distribution became popularized in the United States of America in the 1950s and 1960s by the fast food and hotel industries. Today, franchising accounts for more than $1 trillion in sales, roughly 10% of the entire United States economy, and spans over 75 different industries (Welsh and Alon, 2002). In the 1960s and 1970s, early U.S. adopters of the franchising system, such as McDonald's and Hilton, started to venture abroad. The internationalization of franchising systems was a result of push and pull factors. Push factors included increasing domestic market saturation, competitive pressures, and restrictive regulations; pull factors included attractive environmental conditions overseas, such as increasing incomes, pent-up demand for American-style goods and services, and lack of strong competitors in market niches in which the franchisors were operating. As more and more franchisors forayed abroad, the competitive conditions there intensified and franchisors sought foreign partners to guide and advise them in these foreign lands. Opportunities for simple extensions of the company's model through direct international franchising into culturally and economically similar countries, such as Canada and United Kingdom, have since diminished, and franchisors have started to seek franchisees in emerging and transitioning markets where economic, cultural and legal conditions are more challenging. The question facing many franchisors is less whether to franchise or not to franchise abroad, but rather how to franchise abroad (e.g., what mode of entry to use?). Indeed, the data we analyze in this chapter shows that most domestic franchisors already have a desire to extend their operations internationally. As demonstrated in the literature review that follows, there have been many studies of the determinants of franchising in general, and international franchising in particular. However, concerns have been voiced about the validity of some of these studies, particularly empirically-based ones, since they may have suffered from sample heterogeneity that can mask the applicability of their findings. These concerns have led some franchising researchers to favor explanations of franchising that divide franchisors into different types (e.g., Carney and Gedajlovic, 1991; Castrogiovanni, Bennett, and Combs, 1995). Initial efforts were ad-hoc, utilizing descriptive statistical methods to differentiate among franchisors, and they focused mainly on domestic franchisors. Castrogiovanni and Justis (1998) were the first to provide a theoretical explanation for franchisor types by adapting Mintzberg's (1979) organizational typology to franchising organizations. It is on the basis of these authors that we build our hypotheses in this study. Our chapter uniquely extends their work by being the first to empirically examine the typologies of internationally-minded franchisors at the system level and to focus on the mode of franchise entry they are likely to use.