Franchising of SMEs in China Essay Example | Topics and Well Written Essays - 1500 words

Franchising of SMEs in China - Essay Example Franchising in China proposes great opportunities for local businesses and international small and medium-size enterprises to expand their activities and enter new markets. Following Welsh et al (2006): "franchising is seen as a means of obtaining scarce capital, as the franchise is generally required to make a substantial investment in the business. Franchisees share risk with the franchiser. Franchising is also identified as a way of addressing the agency problem, specifically, the issue of monitoring managers" (2006, p. 130). In China, key to the success of the organization is the mutually dependent relationship between the two companies-the franchisors and the franchise. Miller and Grossman (1986) described franchising as an organizational form structured by a long-term contract whereby the franchisor (usual owner) of a product and service grants the non-exclusive rights to a franchise for the local (in this case Chinese) distribution of the particular product or service. The franchise has to pay a fee and ongoing royalties and agrees to follow to quality standards. Also, a franchise can be defined as "an incentive distribution system for organizing individual firms pursuing their own rewards" (Abbott 1998, p. 76). Taking this perspective into account, researchers determine the phenomenon as an inter-organizational form. A possible, roughly natural rate of SME density also has limited implications for policies designed to promote 'entrepreneurship'. The logic is as follows: Let's assume that heading a small firm is an important mark of entrepreneurship, since the founder of a firm that quickly disappears may be less entrepreneurial than the leader of an SME that exists and survives, whether or not the leader was the original founder. In this analysis, the number of SMEs then becomes a proxy for the number of 'entrepreneurs': Entrepreneurs are the independent leaders of SMEs (Abbott 1998). Once economists accept that this assumption is one logical proxy of entrepreneurial activity (although by no means the only one), we can then say that a roughly natural rate of SME density implies there is little that can help, or hinder, ent repreneurship at the national level in a broadly liberal trading environment (Ambler & Witzel 2003). Ratios of 'entrepreneurs' (leaders of SMEs) are somewhat constant across European national populations. If one measures entrepreneurial activity by the rates of start-ups, then the analysis would change; but it is not clear that high start-up rates on a national scale really correlate with economic success either. The lowest start-up rates in Europe are in rich Sweden, the highest are in southern Europe, where unemployment is high and GDP per capita is lower. Definitions of entrepreneurship should encompass success measured by economic production and profits, and not just frenetic activities, primarily in the low-tech service sector (Justis & Judd 1999). In China, the majority of franchising companies operate as SMEs. In emerging markets like China, "retail franchising can sometimes supplant traditional and local cultural elements, which over time can lead to homogenization and westernization of preferences, especially among the youth. The older generations and the political establishments often resist such cultural shifts" (Welsh et al 2006, p. 132).