When is master international franchising a preferred mode of entry?

The 1990s have seen an increase in the number of international franchisors and foreign franchisee! units. Since the rapid rate of international franchising growth is expected to continue, franchising scholars have predicted that within less than a decade the majority of U.S.-based franchisors will have international outlets (Justis and Judd 1998; Alon 1999a). International franchising consists of "a foreign-market entry mode that involves a relationship between the entrant (the franchisor) and a host country entity, in which the former transfers, under contract, a business package (or format), which it has developed and owns, to the latter" (Burton and Cross 1995, p. 36). This host-country entity can be a domestic franchisee, a foreign franchisee, a master franchisor, or an entity which is partly owned by the franchisor itself. International franchising, therefore, encompasses multiple forms of international franchising, including master international franchising, direct international franchising, and joint ventures. Increasingly, the mode of entry used by franchisors has been master international franchising. Hackett (1976) observed the use of master franchising in a global setting, observing that 20.7 percent of the firms surveyed used this form of organizational structure in their international operations. A more recent study conducted by Arthur Andersen (1996) found that 81 percent of the reporting firms used master franchising in 1996, up from 59 percent in 1989. This study revealed that master franchising was the most popular franchising mode of entry, used by 14 percent more franchisors than direct international franchising. To many franchisors, master international franchising has been a "short-cuf to globalization, sometimes allowing them to develop outlets overseas before they even have outlets in a neighboring state (Ryans, et al. 1999). There are three factors outside the control of the organization that account for the increased use of master international franchising: (1) the increase in United States franchisors' entry into distant and culturally dissimilar countries, (2) the increase in the number of small and young companies entering international markets, and (3) the increase in the number of available master franchisees who are eager to develop a U.S.-based franchising system abroad. Between 1989 and 1996, there was a significant increase in the number of franchise units in emerging markets in Asia, South America, the Caribbean and the Middle East (Arthur Andersen 1996). Younger franchising firms are seeking foreign markets to expand their presence, but much of the international expansion is in response to inquiries from abroad. According to the International Franchising Association, many franchising systems that are 10 years or younger are already franchising abroad or are planning on doing so in the near future. Alon (1999a) found that for the retailing industry, age was negatively related to the franchisor's decision to internationalize, and suggested that younger retailers are seeking international markets early in their life cycles because of domestic market saturation. Ryans, et al. (1999) suggested that the prevalence of unsolicited offers to franchisors from foreign partners helps to explain the increasing use of master international franchising abroad. Often, other companies, large financial investors, government officials, or industry representatives make these offers. Master franchising has been chosen as the focus of analysis because (1) it is the most popular mode of entry by U.S.-based franchisors overseas, (2) compared to the other modes of entry, it has experienced the highest growth in use by franchisors overseas, (3) it is the mode with least risk, commitment and control^ and (4) it is a mode of entry unique to franchising firms, one that has not been the focus of the mode-of-entry literature.