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World Bank takes fresh look at franchising


Philip Zeidman

A few blocks from the White House and about the same distance from the State Department is a building which, with its sleek modernity, blends into downtown Washington. It doesn’t broadcast its presence loudly, but it doesn’t need to: It is the World Bank, potentially one of the most important sources of funding on the planet.

Even though it is situated in the United States, our country—as in the case of the United Nations—does  not own it. But, rather unlike the UN, it might as well: It is the bank’s largest source of funds, its largest shareholder, and its president is either an American or approved by our government.

Founded at the storied Bretton Woods Conference, for most of its history the World Bank devoted itself to seeking to end poverty. In more recent times it has broadened its scope to address other social and political issues—health, education, the environment; and, now with great emphasis, economic development.

Rediscovering the model

It is in connection with the last of these issues that the World Bank has discovered franchising. To be more accurate, it has rediscovered franchising. It does this every few years (OK, every decade or so).

Such is the movement of staff to other assignments or to overseas locations that those involved rarely have any recollection or institutional memory of its prior forays.

So what is it this time around?

Sitting in a conference room at the bank, invited to assist the staff in its efforts to understand the challenges and prospects for franchising in emerging countries, it is impossible not to be impressed. The officials there are thoughtful and smart, with enough advanced degrees to chew through much of the alphabet. They have clearly done their homework, but they are self-effacing about their knowledge, and realistic about expectations—a promising combination.

Their questions are sensible ones, even if we have heard them many times before and reasonable people may still differ on the answers.  Among them:

  • What are the kinds of challenges/issues/impediments that you’ve faced in entering into franchising arrangements in developing countries?
  • How can legal/regulatory frameworks be improved to enable more franchising transactions in developing countries?
  • Which country would you say has a fairly complete and robust legal/regulatory framework on franchising? What are some of the key elements?

What makes this meeting different from all the others over all the years is the angle from which they come at franchising. Like the larger Trade & Competitiveness Global Practice, they are seeking to use the resources of the World Bank to stimulate private-sector activity in selected countries. But where they differ is indicated by the less familiar name of their special niche: “Non-Equity Modes.”

They see franchising as one of several techniques by which a transnational company (say, one based in the United States), rather than having an ownership stake in an enterprise in an emerging “host” country, instead enters into a transaction in which a portion of its operations is conducted by that enterprise itself.

Among the techniques they have identified as fitting within this model are outsourcing of services; licensing; management contracts; and, of course, franchising.

They are clearly onto something. Ironically, that something is very close to the characteristic of modern business that so agitates the U.S.

Department of Labor and some powerful forces in the labor movement in this country: the realization that companies are deploying their resources in the most economically rational way, to shift certain functions to other, frequently smaller, companies that can perform those functions more effectively and with a greater incentive to succeed than hired employees.

Seeing the issue differently

But where the opponents of what they call “fissured industries” are threatened because these techniques may place the larger enterprise beyond the reach of certain regulations or organizing efforts, or make it impractical to seek to impose those constraints or exercise those efforts with smaller companies, the people sitting in the World Bank conference room see the issue quite differently.

It is that very distinction in the way of doing business which appeals to them; and, far from imposing more onerous regulations, they want to facilitate transactions by removing regulatory barriers. They perceive enough commonality among these techniques to enable them to devise common strategies to promote them, and to free them from ill-considered constraints.

They want to learn more about how international franchising works in practice, and that in itself is encouraging. It is premature to predict this latest effort will prove successful when so many others have failed or been stillborn. But on a hot summer day in Washington it is, at a minimum, refreshing.

Philip F. Zeidman is a senior partner in the Washington, D.C., office of DLA Piper. He can be reached at Philip.Zeidman@dlapiper.com

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