What types of franchises do people create and why - Essay Example

TYPES OF FRANCHISES Introduction “Franchises are also called chain stores. These are businesses which are run under special arrangement. They are industries under moderation and which follow a set model of business, including a name, an image or logo and a set of support services. There are different modes of entry into franchising. These modes of entry can be viewed either as equity-based or non-equity-based. In equity-based, there are two choices; equity joint ventures and wholly owned operations.

In non-equity-based, there are also two choices; contractual agreements and export. In the international literature of business, modes of entry have long been considered as in close association with varying degrees of risk exposures, control, resource commitment, and profit return. Past studies indicate that the choice of modes of entry depends on distinct factor types, such as industry-specific, country-specific and firm-specific factors (Caves 2001).The major types of entry modes include equity-based and non-equity-based.

Equity mode of entry is further divided into wholly owned operations and equity joint ventures. Non-equity entry mode is split into export and contractual agreements. The wholly owned subsidiary involves mainly Greenfield and acquisition. Equity joint ventures involve minority equity joint ventures, 50 % equity joint ventures and majority equity joint ventures. Contractual agreements involve licensing, risk and reward contracts, alliances and direct investment. Export involves direct export and indirect export (Erramili 2002).

Advantages and disadvantagesSome of the limits of the equity-based types of entry modes are: they call for a vital resource commitment in location across the country’s borders. It requires enough or large investment to start an independent operation. The equity-based type requires a continuing direct management of the establishment. It also needs one to interact constantly with different local parties. The advantages of the non-equity-based include: it does not need one to establish an independent organization, the connection between parties can specified and fixed during the contract (Michael 2002).

The entry mode choice refers to the control level or degree desirable to a firm when it ventures into a foreign market. The choice of enterprises can be done through asset specificity and foreign market entry mode. Asset specificity is used for description of investments which are specific to a transaction, and which are reduced in alternative. The personal nature of the investments makes them susceptible to opportunism making safeguarding a vital issue. Since competition on the market can not manage opportunism, governance mechanisms are implemented by firms for protection of their investments from negotiation inefficiency, haggling and losses.

Some studies of entry mode find support for a positive connection between foreign market entry modes and asset specificity, while others are not able to tell if this association exists (Pan 2000). Transaction cost economics received criticisms for lacking contextualization. The limited extent to which transaction cost economics recognizes social and contexts of institutions and extended TCE to well examine the knowledge governance have been emphasized. Although scholars have tried to make transaction cost economy contextualized, the literature of the entry mode is still not enough considering contextualization of the connection between asset specificity and choice of entry mode (Watson & Stanworth 2006).

Therefore, if a firm has to consider equity modes and non-equity modes, it needs to assess the risk of investment and reward, adaptation to local environment, location choice, control of operation and management. Modes of equity are different from modes of non-equity in control, risk and return, and resource commitment. BibliographyCaves, R. E. and murphy, W. F. 2001.

Franchising: Firms, Markets and Intangible Assets. Southern Economic JournalErramilli, M, K,, Agarwal, S and Dev, C. S. 2002. Choice Between Non-Equity Entry Modes: An Organizational Capability Perspective. Journal of International Business Studies, 33, 2: 223-242Maekelburger, B., Schwens, C. and Kabst, R. 2012. Asset specificity and foreign market entry mode choice of small and medium-sized enterprises: The moderating influence of knowledge safeguards and institutional safeguards. Journal of International Business Studies 43,458–476Michael, S. C. 2002.

Can a franchise chain coordinate? Journal of Business Venturing 17 325-34Pan, Y. and Tse, D.K. 2000.The Hierarchical Model of Market Entry Modes. Journal of International Business Studies, Vol. 31, No. 4. pp. 535-554Watson, A and Stanworth, J. 2006. Franchising and intellectual capital: A franchisee’s perspective. Entrepreneurship Mgt. 2: 337–349