Can India become a franchising paradise?

TRADE ZONE/ TRADE AGREEMENTS

A strong intellectual property regime is required in India for successful franchise operations.

'Franchising' in French means 'honesty'. SMEs would find it very interesting to note that they were central to the growth of franchising when the concept first developed in the US. Issac Singer who introduced an advance version of the sewing machine used the concept of franchising to increase the sales of his sewing machines. Although he was unsuccessful, he provided the world with a concept that has structurally enhanced the relationship between the creator of products and services, entities involved in their sales and distribution, and the consumers.

'Franchising' is generally described as the granting or licensing of certain intellectual property rights by one agent (the 'Franchiser') to another (the 'Franchisee'); and the access for the franchisee to certain tangible and intangible benefits and privileges. Franchising is a 'business strategy' and, like any business strategy, it is designed to maximise market share and minimise risks for its participants.

The greatest strength of franchising as an SME development business model lies in its contribution to increasing the success rate of SMEs, when comparing franchise outlets vis-à-vis independent businesses. The new entrepreneurs (franchisees) enter the market by investing in a system with a proven concept and enjoy the support of their respective franchiser.

This comparative advantage has been reported worldwide. For example, in the Philippines, 95 per cent of franchising SMEs compared to 25 per cent of independent companies survived the 1997 Asian economic crisis. In Australia, franchising as a business model is 2.5 times more successful than other SMEs. In South Africa, failure rates are registered at 15 per cent for franchised businesses as opposed to 80 per cent in independent SMEs.

In fact, a strong intellectual property regime is required for a successful franchise operation. With such a regime to its credit, India can very well become a 'franchisers/franchisees' paradise with its growing middle and higher middle class and deepening brand consciousness.

The FTAs being signed by India will provide a better market access for goods from other countries and will, therefore, offer an opportunity for their creators to experiment with different models of franchising. One excellent example that we are already witnessing is the way in which 'Dilmah Tea' has deepened its market access into India by successfully combing FTA-based market access with effective franchising.

While Indian SMEs would like to take advantage of franchising the major hurdle which they generally face is lack of information on the market and the players in the market who would be willing to be their franchisees. There is a substantive cost to extract this information and unlike in many other countries such as USA, Israel, Ireland, Italy etc, the chambers of commerce and government machinery of India fails to provide timely and qualitative information to SMEs.

Given the growing opportunity that Indian SMEs stand to enjoy due to the FTAs, the first and foremost agenda of the government, especially the Ministry of External Affairs, should be to empower the economic attaches in their respective missions in various countries. Such empowered missions will be in a position to help SMEs locate franchising opportunities.

The author is chief economist at Economic Laws Practice, Advocates & Solicitors