International franchising has grown significantly since the 1960s
because of both push and pull factors. Domestic saturation, increased
competition and diminishing profits at home have pushed franchisors
to examine their opportunities abroad, while favorable macroeconomic,
demographic and political conditions abroad pulled them into specific
markets. The initial expansion of U.S.-based franchisors was to
culturally-similar, politically stable, and economically rich countries
such as Canada and Western Europe. In recent years, however, opportunities
have diminished in these countries as well, and international franchisors
have begun to seek development opportunities in emerging markets.
Eighty percent of the world's population lives in emerging markets.
Also, the U.S. Department of Commerce estimated that over 75 percent
of the expected growth in the world's trade over the next two decades
will come from developing countries, particularly big emerging markets,
which account for over half the world's population, but only 25
percent of its gross domestic product. Despite the potential, these
markets pose a series challenge to franchisors as conditions vary
considerably from the developed markets in which international franchisors
have the bulk of their experience.
Assessing the economic potential in emerging markets is important
for international franchisors who wish to prioritize markets for
expansion, choose an appropriate mode of entry, and select a proper
fee structure for their franchise system. While a detailed discussion
of all the factors relevant to the assessment of economic potential
in emerging markets is beyond the scope of this article, I will
discuss three commonly-used factors which franchisors need to analyze
in more detail. These are the GDP per capita, the level of population
and the growth rate of the economy.
Emerging markets are often classified based on their GDP per capita
(GDP divided by the level of population). This variable is used
because it signifies the level of income and the state of the economic
and political well being of the country, but if used incorrectly
can distort the view of the country's economic potential. It is
important to adjust GDP per capita to purchasing power in emerging
markets when examining the economic potential. This is because the
prices of inputs and the cost of living is significantly lower in
emerging markets compared to the major industrialized countries.
Thus, the purchasing power of the citizenry of emerging markets
is often higher than what the official unadjusted GDP per capita
statistics may show.
The level of population is an often-touted measure of economic
potential in emerging markets. With a population of about 1 billion
people, China and India (two of the biggest emerging markets) are
considered to be among the most attractive locations for expansion.
The reality is that the majority of the population in these countries
does not earn sufficiently to afford western-style products and
services and does not live in the major urbanized areas in which
international franchisors are accessible. In the People Republic
of China, for example, three key cities Beijing, Shanghai, and Guangzhou,
offer the greatest potential for global franchisors.
The economic rate of growth is a variable that needs to be emphasized
in analyzing the market potential of developing markets. While developed
markets exhibit very low single-digit growth rate, many emerging
markets sustain high levels of growth both in the GDP and in the
GDP per capita. Such statistics should be viewed favorably by international
franchisors because they parallel the development of pent-up demand
for western-style goods, lessen the political risk and social discontent
of the citizenry, and point at an emergent middle class. According
to an Arthur Andersen study, the existence of a middle class is
the most important factor in determining whether a host country
will be suitable for international franchising expansion.
The variables discussed here, as well as many others that need to
be analyzed before making an entry decision, can be obtained from
the U.S. Department of Commerce as well as International Institutions,
such as the World Bank, the United Nations, and the International
Monetary Fund. Interested franchisors should also consult the recently-published,
first and only two books on the subject: International Franchising
in Emerging Markets: Central and Eastern Europe and South America
and International Franchising in Emerging Markets: China, India
and Other Asian Countries. These books are published by CCH,
Inc. and can be purchased by visiting the CCH Online Store.