FC Mgt in East Asia

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? Academy of Management Executive, 1990Vol. 4 No. 2.............................................................................................................................................................................

Franchise managementnE a s t A s i aPeng S. Chan, California State University, FullertonRobertT. Justis,Louisiana State University

Executive Overview Franchising is the fastest growing method of doing business today. It isbecoming a major catalyst for economic growth, employment, and developmentnot only in the United States but also in the international marketplace.Franchising has moved from traditional product (trademark)areas such asautomobiles, petroleum, and soft-drink bottlers to the standard industries of fastfood, cosmetics, cleaning, convenience stores, computers, and financial services.In almost any area of business, franchising is a reality. We believe that it willsurpass every method of doing business by the end of this century.The move toward international franchising is increasing as the U.S. domesticmarket becomes saturated and opportunities in foreign markets becomeapparent. We found that the economic growth of the Asian Pacific Rim in thelast decade is presenting tremendous opportunities for U.S. franchisors. Severalstrategies for franchising in East Asia are presented in this article. Majorconsiderations involved in franchising in this region-understanding the localculture and foreign regulation-are also discussed. Finally, the climate forfranchising in Japan, the People's Republic of China, and other majorEast Asiancountries are examined.

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Article It is not necessarily news that a third of American retail dollars are spent throughfranchising stores. It is not unusual for a consumer to rise early in the morning touse automotive products, withdraw money from a bank, eat at a restaurant, visit adentist or a doctor, buy drugs from a drug store, take clothes to the cleaners, visita health club, and pick up food for the family before returning home at night-alldone through franchised organizations.Franchising, which is the fastest growing method of doing business in the U.S., ischanging not only our marketing system but also our way of life. It offersopportunities for entrepreneurs and ordinary people to own a business as well asto compete favorably with larger establishments.Although born in the U.S.A., franchising has spread abroad in recent years and isgaining widespread acceptance in international markets.Today there are over 350 franchising companies in the United States with morethan 31,000 outlets operating in international markets including Canada,Australia, United Kingdom, Japan, and the rest of the world. 1 One of the areas inwhich it is growing rapidly is in East Asia. This growth has correspondedsomewhat to the overall economic expansion of the Pacific Rim countries in thelast decade.2 Japan, for example, has emerged as one of the largest franchisingcountries in the world and is runner-up only to the United States and Canada withrespect to the total number of franchisors and franchisees established.The purpose of this article is to exalmine some strategies for franchising in EastAsia and to survey the business and regulatory climate in this region, Japan alnd

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China, in particular. After briefly defining what franchising consists of weexamine strategies for franchising in East Asia. Next, the cultural aspects ofmanaging franchising organizations in East Asia are discussed. We conclude withan assessment of the economic and regulatory climate in Japan and China, andseveral other major East Asian countries.The Franchising BoomAccording to a recent survey by the Department of Commerce, Japan continues tobe the second largest market for United States' franchisors with a total of 7,366units, of which 72 percent represent various food categories such as restaurants,ice cream stores, convenience food stores, and donut shops. China now acceptsforeign franchisors into its country and has established a working relationship withsome franchising organizations as it builds up hotels and food service businesses.The proliferation of franchising in foreign countries is due to several economic anddemographic trends: (1) universal cultural trends, (2) increased disposable income,(3) improved international transportation and communication, (4) improvingeducational levels, (5) rising standards of living, (6)increasing number of womenin the workforce, (7) smaller families with two or more incomes, (8) shorter workweeks, (9) younger generations willing to try out new products, and (10)demographic concentrations of people in urban areas.In addition, franchisees in foreign markets are realizing the same advantages thathave attracted so many U.S. entrepreneurs to the idea. The franchisee has anopportunity to use proven methods of operation, large-scale, high-impactadvertising, recognized brands or trademarks, and continuing management andtechnical assistance. Hence, franchising provides an opportunity for the franchiseeto succeed as a small business owner because of the knowledge, methods,competitive experience, and advertising clout of the franchisor. Both the franchisorand franchisee bring their strengths to the business arrangement.

The franchisee has anopportunity to useproven methods ofoperation, large-scale,high-impactadvertising,recognized brands ortrademarks, andcontinuingmanagement andtechnical assistance.

Thereare five major starting strategies for franchising in East Asia: (1)theestablishment of a master franchisee, (2)joint venture (doing business withforeign companies or individuals), (3) licensing, (4)direct investment, and (5)establishing a franchising agreement with the local government as franchisee.Master Franchisee. The master franchisee may be an individual, business, orconglomerate corporation which assumes the rights and obligations to establishfranchises throughout a particular country or region (see Figure 1). This is a verycommon strategy used by American firms to franchise into Asian countries.McDonald's and Kentucky Fried Chicken have successfully used this strategy in

MasterFrmrchtsee SubfrmnchiseesLbfrcnciseestbfracfiseesFigure 1. Master Franchisee Organization

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Asian markets. Normally, the franchisee sets up 1 or 2 stores during the first yearof operation and expands to 25 or 30 stores within 5 to 10 years. Masterfranchisees have the option of developing sub-franchisees or opening all units bythemselves. The master franchisee in the host country assumes the role andresponsibilities of the franchisor. All royalty fees are paid by each sub-franchiseedirectly to the master franchisee; the master franchisee usually keeps up to 60percent of these royalty payments and then submits the remaining 40 percent tothe headquarters operation. Generally, all advertising fees are paid directly to themaster franchisee, who then uses them for local (host nation) advertising.The International Franchise Association reported: "Master franchising is themethod used by 57 percent of responding members franchisinginternationally.... Individual contracts (licenses) are used by 19 percent ofrespondents to the new survey, joint ventures by 12 percent, and foreignsubsidiaries (direct investment) by 6 percent."3Joint Venturing. With this strategy, the franchisor teams up with local citizens inestablishing franchise units. Master franchising is actually a special form of jointventure, where the franchisee is given the right to sub-franchise or establishfranchise units within a particular country or region. In a pure joint venture, thefranchisee does not possess this right. There may be as many joint ventures as thefranchisor may wish to enter within a particular country or region, whereas therecan only be one master franchisee in a particular country or region.Both the master franchising and joint venture strategies share certain advantages.For example, they require investment from both the franchisor and the franchiseein the foreign business operations. This is an advantage because many countriesrequire local equity injection as a requirement for obtaining governmentpermission and also because other methods of franchising may not be allowed inthe country. The local partner in a joint venture is seen as a "joint partner" ratherthan a franchisee. The Hilton Hotel system uses joint venture managementcontracts to manage its hotels throughout East Asia.Another advantage of master franchising and joint venturing is that the localpartner understands the political and bureaucratic problems of his country farbetter than his foreign partner and is in a better position to negotiate withgovernment agencies and private businesses. Furthermore, the local partner canhandle all language problems, cultural differences, and help develop localmarkets through appropriate means of advertising and promotion.Both the master franchising and joint venture strategies provide native individualsor organizations the opportunity to develop and manage franchising systems.Many East Asian countries have regulations limiting expatriate visas. This meansthat the franchisor either has to manage an indigenous staff from thousands ofmiles away or rely on a joint venture partner. The government may also limitroyalties and the transfer of funds. The master franchise or joint venture has theadvantage of spreading the risk of investment and providing opportunities forlocal involvement and participation. Critical elements to remember in establishinga joint venture agreement with an East Asian investor are royalties, fees,capitalization, personnel, quality control, accounting, access to records, term,termination, and rights on termination. The right to retain the trademark may belimited to a five year contract by government agencies. In addition, the success orfailure of joint ventures usually depends on selecting the right partner.Licensing. Another method of international franchising is for the franchisor(licensor) to develop an agreement with a local licensee (franchisee) and offer theright to use a product, good, service, trademark, trade secret, patent, or othervaluable items in return for a royalty fee. The franchisee usually benefits from the

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Furthermore, the localpartner can handle alllanguage problems,cultural differences,and help developlocal markets throughappropriate means ofadvertising andpromotion.


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technical or business knowledge of the franchisor. In return, the franchisor isgiven the opportunity to enter a foreign market at little or no risk. Coca-Cola hasentered most of its East Asian markets by licensing bottlers (technically,franchising bottlers) throughout East Asia and providing the syrup to produce thesoft drink.Direct Investment. A fourth strategy for entering East Asian markets is throughdirect investment. The franchisor simply invests in company-owned stores orsubsidiaries in foreign markets.This strategy is the direct opposite of the master franchisee, joint venture, orlicensing agreement where the local franchisee controls the business. It is seldomused in East Asian countries because local governments generally do not allowforeign investors to own and control the entire business. Creating acompany-owned store or wholly-owned subsidiary in a foreign country means thatthe foreign investor (franchisor) provides all the money necessary for starting upthe local unit. The foreign investor is also responsible for the management andoperation of that unit. This mode of franchising is opposed by many governmentsbecause there is a lack of local investment and management developmentinvolved. Since indigenous people do not have any equity in this mode offranchising and do not own the unit they can only be employees. The majorproblem with this strategy is the foreign investor's lack of familiarity with localconditions, which exposes the franchising organization to many business andpolitical risks. This has caused the demise of direct investment franchises in manyforeign countries.Government. The final strategy for franchising involves the foreign government asthe local/master franchisee. This strategy is actually a variation of the masterfranchising and joint venture strategies in that the local partner is the governmentinstead of a private individual or business. The foreign government can be amaster franchisee or merely a joint venture partner, depending on the particulararrangement.This strategy is used primarily by foreign firms franchising into China. KentuckyFried Chicken, for example, used this strategy when it entered the Chinese marketrecently. The company's operation in China is a joint venture with KFCInternational which contributes 60 percent of the investment, the remaining beingshared between 2 Chinese government bodies. The Sheraton Great Wall Hotel inBeijing, China, is a joint venture with Sheraton Corporation as the franchisor andthe Chinese government as the franchisee. The Chinese government appoints themanagers and administrators needed to run the hotel. These people are thentrained by the Sheraton staff.

2 ~~~~~~~~~~BusinessForeign Agreement GoverrnmentFranchisor Partner

Control

Figure 2. Government-ControlledFranchise Organization|

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There are several advantages in having the government as the local franchisee.First, the franchisor need not worry about compliance or non-compliance with thelaw. Second, financially the government is in a stronger position than a businessor an individual and would have little difficulty providing the necessary capital torun the franchise. Third, general adherence to quality standards is more likely.Finally, payment of royalty fees is guaranteed unless otherwise stated in thefranchise agreement.A disadvantage of this mode of franchising is that the government is generallyless able to attract qualified managers and staff than a private business.Furthermore, as in the case of most bureaucracies, government workers sufferfrom a lack of motivation due to weak incentives. Loss of control is somewhatinevitable because governmental operations are so large. In addition, therestrictions imposed by the government on the franchisor may limit options andactivities. For example, the government may require that the local unit berestricted to a certain area which may turn out to be a poor location.Cultural ConsiderationsManaging franchising organizations in the international arena is similar tomanaging any other form of business in a foreign country: success depends inlarge part upon how well the franchisor understands the foreign market. And thisrequires, among other things, a good understanding of the society and culture.Den Fujita, the president of McDonald's Company in Japan notes, "Americanexporters should study the cultural aspects of Japan more carefully. You must sendfirst-class Americans, experts, to Japan. Before you start production, you mustlearn Japanese culture and what Japanese are like. Then you can export in hugequantities."4 Indeed, McDonald's success abroad is due to its ability to introducemajor cultural change. In Japan and other East Asian countries, McDonald's notonly had to introduce the hamburger but also influence the local managementculture. The company established a Hamburger University in Japan to train storemanagers how to run an American business Japanese-style. In a major departurefrom typical U.S. practice, the company in Japan avoided the suburban sites andinstead focused on urban shopping centers where the customers tend to be. Thecompany also made modifications, such as targeting all advertising to youngerpeople, because the eating habits of older Japanese are very difficult to change.The company even went to the extent of changing the pronunciation of their nameto "Makudonaldo" because the Japanese found it difficult to pronounceMcDonald's. For the same reason, Donald McDonald replaced Ronald McDonaldin Japan.5Translation and not pronunciation was a problem for Coca-Cola in China. Whenthe world's largest soft-drink retailer entered the Chinese market in 1982, it neededto translate its trademark into the Chinese language. One of its first translationsmeant "bite the wax tadpole." After much professional consultation, the Chinesecharacters which the company now uses translate as "permit the mouth torejoice."Cultural TraitsSince an indepth study of Asian cultures is beyond the scope of this report, wefocus on China and Japan-the two most important countries in terms ofpopulation and size of economy. Cultural traits that we think are useful in themanagement context are highlighted.There are many similarities in the cultures of the East Asian people. The culturesof the East Asian countries are deeply rooted in the teachings of the Chinesephilosopher, Confucius. Futurologist Herman Kahn labels these cultures as"neo-Confucian." He suggests that Confucianism is to East Asia what the

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Indeed, McDonald'ssuccess abroad is dueto its ability tointroduce majorcultural change.


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Protestant ethic is to Western Europe. Kahn asserts that the East Asian countrieshave common cultural roots going far back into history, and that for the post 30years this cultural heritage has given them a competitive advantage for success inbusiness. 6Confucianism consists of practical rules to guide daily life such as: (1) respect forthe elders and tradition; (2) importance of acquiring education and skills; (3)importance of hard work, persistence, and patience; (4) importance of self-respectand dignity ("saving face") in the conduct of social relations; (5) thrift, and (6) thefamily's position as the threshold of all social organizations. The last teaching, inparticular, has molded Asian society into its present form. A lot of Asian(especially Chinese) businesses are run by the family, which includes not only theimmediate family, but all other blood ties as well. The Chinese and the Japanesedo differ in this respect, however. Some evidence shows that the Chinese aremore concerned for their family than the organization they work for. While it maybe difficult for the Chinese to transfer their loyalty from the family to theworkplace, the Japanese have little difficulty in doing that.7

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In dealing with the Chinese or Japanese, negotiations may take a long time, asmany as three years for a licensing agreement. Thisproblem is exacerbated inChina because of the involvement of multiple parties. The Chinese and Japaneseare tough negotiators, and they believe that patience is of particular value innegotiations.In addition, it is advisable to go through a middleman or third party whennegotiating. Promotion of one's products or services is usually more effectivelydone through a third party or documented literature.Choosing a good partner may be just as important as patience.8 In the classicfilm, "The Colonel Comes to Japan," shown by Kentucky Fried Chicken, Mitsubishi(the company's Japanese partner) kept iterating its position that a good partner is apatient partner. McDonald's partner in Japan was the most critical element to itssuccess there.Normal cut-and-dry business relationships 'a' a American are insufficient to satisfythe Chinese or Japanese; these must be suplemented by a social relationship. Infact, it is often during the "entertaining phase" that business and political mattersare completed. Both cultures place a lot of emphasis upon trust and mutualconnections in business.The Chinese and Japanese come from "non-adversarial" cultures where problemsare traditionally solved through mediation and compromise. They favornon-legalistic practices instead of more formal and legal ones. Insistence on highlylegalistic documents may be viewed as mistrust.Preserving dignity and achieving accord and harmony are usually moreimportant than achieving higher sales and profits. The Chinese and Japanese aremore interested in long-range than short-range benefits. There is also emphasis onreciprocity in social and business relationships-in spirit, at least, i f not in gifts.9Franchising seems to fit well with the existing structure of most Asianbusinesses-it is an ideal form of a family-run business. Most franchiseorganizations in the United States originated as the "mom and pop" type andmany remain family-run businesses today. In fact, McDonald's often brags aboutits ability to preserve a "family-like culture" when talking about its successesabroad.

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Other long-standing Asian traditions, such as the master-apprentice relationship,are compatible with the franchisor-franchisee relationship, as opposed to themore distant seller/buyer relationship. The inherent inequality in thefranchisor-franchisee relationship actually represents a very desirable state inAsian cultures.Asian qualities such as the work ethic, loyalty to the organization, and attractionto the West and Western products/services, also suggest that the franchisingconcept would work in these cultures. One negative aspect of franchising may bethe termination clause which runs counter to the Japanese ideal of a lifetimecareer. This ideal, however, is beginning to change as we see the increasing useof placement counselors and job-search agencies in Japan.Foreign RegulationAlthough plentiful opportunities exist for franchising in East Asia, laws andregulatons imposed by local governments create problems. Today localgovernments throughout the region discriminate against franchising. It isparticularly acute in developing countries where the efficient use of scarceresources and the importation of technological services and businesses are greatconcerns. Developing countries discriminate against franchising because it isviewed as a marketing system rather than as an economic contribution to thecountry. Franchising agreements that are technology-based, however, are highlyfavored by local governments because they provide an advanced technology orservice needed by the developing country. Franchises for general industrialproducts are less favored. Franchises that involve mere usage of trademarks areprobably the least favored among the East Asian governments. 10Many Asian countries view franchise agreements (particularly trademarks) asinstruments of exploitation. It is argued that trademarks cause prices to risewithout a corresponding increase in the quality of the product/service. Persuasiveadvertising, as argued, will lead to resource misallocation and ultimately to anadverse balance of payments.This negative view, however, is beginning to change. Today, franchising plays asignificant role in the economic development of Japan and the newly industralizedcountries of East Asia. It is providing business opportunities for local people and isexpected to contribute to economic growth and increased employment in the EastAsia region.Climate and ProspectsJapanJapan is probably the strongest advocate of franchising in East Asia. The firstU.S. franchises appeared in this country around 1965 with seven franchiseestablishments. This number has increased tenfold. Arby's, Budget Rent-A-Car,Dollar Rent-A-Car, Computerland, Holiday Inn, Pearle, Kentucky Fried Chicken,Dairy Queen, Denny's, International House of Pancake, Putt-Putt Golf, Century21, Mrs. Field's, Steve's Ice Cream, and Dunkin' Donuts are just a small sample offranchises residing in Japan.McDonald's is the largest fast food business chain in Japan, with sales revenues ofover $700 million a year. McDonald's, however, is facing increasing competitionfrom both Japanese and other U.S. burger chains. In fact, despite the tripling ofsales and the number of franchised units over the last decade, franchising stillaccounts for only 4 percent of total retail sales in Jalpan, as compared to 33 percentin the United States."lThe regulaltory climate in Jaipanis conducive to franchising. Japan recentlyunderwent mnajor hanges in foreign investment regulations. Prior to these


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changes, notification to relevant ministries through the Bank of Japan wasrequired to set up a wholy-owned subsidiary or joint venture operation..............................................................................................................................................................................

Today, Japan encourages foreign investors to develop business opportunities inJapan. Foreign franchisors can bypass a prescribed waiting period imposed bythe government to develop franchising opportunities. Joint ventures areencouraged and have been the most successful type of operations in Japan.It is now easy to remit fees or royalties back to the franchisor countries. Exchangecontrol approval is not required. The profit tax imposed upon the joint venture orsubsidiary is around 55 percent, by far the highest among all East Asiancountries. Conversely, the 10 percent withholding tax imposed upon dividendsand royalties payable to the U.S. franchisor is lower than that of most other EastAsian countries.ChinaWith a population exceeding one billion, China represents a huge potentialmarket for foreign investors. Since 1974, China has embarked on a program ofeconomic modernization to improve its industries, defense, agriculture, andscience and technology to world standards by the year 2000.In sharp contrast to Japan, franchising in China today is embryonic at best. Chinahas only very recently opened its doors to foreign businesses. Hotel chains such asHoliday Inn and Sheraton Corporation were among the first franchises to makeinroads into Chinese territory.More recently, fast-food businesses, which have already established themselves inother East Asian countries, are trying to get a slice of this huge market. KentuckyFried Chicken established its first outlet in Beijing in 1987. It is now the world'slargest KFC restaurant with unit sales of over 350,000 chickens per year. Thecompany also plans to open more outlets in Beijing and expand into other majorChinese cities such as Canton and Shanghai. McDonald's has also indicated itsplans to go into China, although its move will depend on the emergence of aChinese middle class. The hamburger chain is already helping China improve itsfuture foreign exchange in various ways.One of the major difficulties for franchising in this country is the plethora of lawsand regulations governing foreign investment. 13The Chinese government,through its agencies and officials, closely monitors all foreign businesses. Ingeneral, the Chinese government has a preference for foreign investment withequity being provided by both parties. Hence, joint ventures are rather common,with the Chinese government acting as the local franchisee.For joint ventures, approval is required from the foreign exchange controlauthority (called the State Administration for Exchange Control) for theexpatriation of royalties, or fee payments. This is generally not a problem once afranchise is approved.The use of direct investment or a wholly-owned subsidiary has been effectivelyprecluded in the past. Recent developments, however, have indicated thatwholly-owned foreign operations are now encouraged. Multinationals, such asPepsiCo, have been able to establish 100-percent-owned operations in China.China has also begun to recognize the need to offer protection to foreign ownersof trademarks. China imposes a 33 percent profit tax on the joint venture orsubsidiary and a 10 percent withholding tax on royalties and dividends payable tothe U.S. franchisor.

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Another major stumbling block to foreign operations in China is the dearth of localmanagement skills and knowledge. The overly centralized Chinese economicsystem does not foster these skills. The Chinese general manager is not requiredto do long-term planning, since the plan is made at the top. Since he has controlover so few resources (most of which are defined and fixed in the annual plan)setting long-term goals and strategies is futile. In such an environment,management skills are not developed. In addition, the education level andtechnical expertise of top Chinese management are very low. Given this, it is notsurprising that management usually adopts a satisfying-the-bureaucracy attitudeand demonstrates a general lack of initiative. 14In the past, the People's Republic of China has rejected Western management

Table 1Franchising in East AsiaCountry Regulations Status of Franchising Taxes New Developments

South Korea - Foreign investment * Franchisingnot * 40%profittax on joint * In the process of* Exchange controls encouraged ventures recognizing* Jointventures possible * 10.75%withholdingtax internationalif local franchises hold on royalties & trademarks,patents,50% dividends payable to tradenames &*Held by large U.S. franchisor. intellectual propertyconglomeratesSingapore * Approval requiredfor * Foreign investors * 40%profittax on theretailingand licensing expected to pass on foreign subsidiary ofby the Ministryof relevant experience, joint ventureTrade and Industry skills,&procedures toSingapore citizens.Hong Kong * Limit on the * Generally freely open * 16.5% profit tax on * Food servicerepatriationof royalties to foreignfranchisors foreign subsidiaryor businesses &hotelwhile dividends can be * No trade barriers joint venture franchisorsare findingpaid back to * 1.65%withholding tax lucrative market.franchisors. on royaltiesTaiwan * Strictexchange control *Franchising througha * 35%profittax on joint * Recently opened aand foreign investment wholly-owned ventures Patent &Trademarkregulation subsidiarynot usually *35% ax on dividends consulting center*Foreign investment granted * 20% ax on royaltiesapproval requiredfor * jointventuresthe repatriationof agreementsprofitsor royalties * Few agreementsextend beyond 5 yearsMalaysia * Exchange control * Wholly-owned *minimal * Recent policies to boostadministeredby the subsidiaryor joint economic developmentCentralBankon behalf venture have relaxedof the Malaysian regulationsgovernment.*Importcontrol-governmentThailand * Exchange controls * Joint ventures * 20% Dividend tax * Thai-U.S. Friendship*Foreign investment * Franchisingwith * 25%Royaltytax Treatyhas made U.S.majority oreign *40%profittax franchisorsexemptownership- not fromalien businessapproved. controllawsIndonesia * Stringent foreign * Jointventures-only if * 20-45% profittax on a * Most franchises areinvestment laws they fall into the govt. s graduated scale rejected if theyfre notpriority ist *20% ax on dividends & technology-relatedroyaltiesPhilippines * Exchange controls * Jointventures * 35%profittax* Foreign investment * Agreements limited to * 20%dividend tax5 years * 25%royaltytax* 1-2% expatriationofroyalties.

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systems for cultural, environmental, and ideological reasons. The situation hasbegun to change. Since 1978, several organizations have emerged that arepromoting Western management education and the application of Westernmanagement techniques. Two notable organizations are the Chinese ResearchAssociation for Modern Management and the China Enterprise ManagementAssociation. More change seems to be in store. For example, in early 1988, theChinese Parliament (the legislative arm of government) was considering passing anew enterprise law aimed at strengthening the manager's role and givingenterprises more control over assets. Under the new law, the local political partywill still have a say in management, but its role will be reduced to "guaranteeingand supervising" to ensure that party policies are carried out. The intention of thislaw is to divorce ownership of state enterprises from their management. It will alsogive legal backing to the ongoing experiment of allowing individuals or groups tolease small businesses from the state. 15FutureProspects: What Are We Waiting For?Opportunities for franchising in East Asia are plenty. Regulations on foreigninvestment are being relaxed and franchising is acting as a catalyst for economicdevelopment in Japan, Hong Kong, Singapore, and Taiwan. It is also transferringmanagement skills and know-how to countries that needed them. Given thesebenefits, it is foreseeable that franchising will become increasingly accepted andencouraged in East Asia. The question then is not whether U.S. franchisors shouldmove into East Asian markets; it is when.

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Appendix Table 1 briefly describes the climate for franchising in some of the other EastAsian countries. 16

Endnotes l A. Kostecka, Franchising in the Economy1986-1988 Washington, D.C.: U.S. Departmentof Commerce, January 1988),8-10.2 For documentation on this, see, forexample, "ThePacific Century,"Newsweek,February 22, 1988;and L. Kraar, "ReheatingAsia's LittleDragons,"Fortune, May 26, 1986.3 Franchising World, 1985,17, 4.4 Quoted in P. Harris and R. Moran,Managing Cultural Differences (Houston:GulfPublishing Co., 1987),398. See, also, R. Blumm,"InOsaka, Do as the Osakans Do," Far EasternEconomic Review, August 18, 1988,59-60.5 For an account of McDonald's success inother counries, see J. Love, McDonald's:Behindthe Arches (New York:Bantam Books, 1986),and"McWorld?," usiness Week, October 13, 1986.6 HermanKahn, WorldEconomicDevelopment: 1979and Beyond (Boulder,Colorado:Westview Press, 1979).On howConfucianism has influenced economic success

in East Asia, see G. Hofstede and M. Bond,"TheConfucius Connection: From CulturalRoots to Economic Growth,"OrganizationalDynamics, Spring 1988, 16,5-21.7 See, for example, L. Hsu, lemoto: The Heartof Japan (Cambridge, Mass.: SchenkmanPublishing Co.. 1985).B See, for example, P. Grub, "A Yen for Yuan:Tradingand Investing in the China Market."Business Horizons,July-August 1987, 16-24; ndG. Bronson,"TheLong March,"Forbes,December 15, 1986, 182-185.

There is a growing body of literature onChinese and Japanese culture and businesspractices, including: Harrisand Moran, Endnote3;JohnFrankenstein, "Trends n ChineseBusiness Practice: Changes in the BeijingWind," California Management Review, 1986,29, 148-160;LucianPye, "TheChina Trade:Making the Deal," HazvardBusiness Review,July-August 1986,74-80;Lawrence Tai, "DoingBusiness in the People's Republic of China:Some Keys to Success," ManagementInternationalReview, 1988,28, 5-9; M. Bond,ThePsychology of the Chinese People (London:OxfordUniversity Press, 1981); . Saunders andT. Chong, "Tradewith China and Japan,"Management Decision, 1986, 24, 7-12;J.Abegglen and G. Stalk, Jr., KAISHA,TheJapanese Corporation New York:Basic Books,1985);R. Pascale and A. Athos, TheArt ofJapanese Management (New York:WarnerBooks, 1981); nd RobertChristopher,TheJapanese Mind: TheGoliath Explained (NewYork,LindenPress/Simon &Schuster, 1983).'? For a rather interesting discussion ofdiscrimination against franchising in East Asia,see D. Shannon, "Franchising n East Asia,"East Asian Executive Reports,December 1983,9-22.11An interesting case study of franchising inJapan is provided by P. Zeidman, InternationalFranchising (Chicago: Commerce ClearingHouse, 1987).12 There is a growing body of literature that

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focuses on the economic development andmodernizationof China, including: "ChinaThrowsOpen Its Seaboard," The Economist,March 12, 1988;"China's Economy,"TheEconomics, August 1, 1987;Joseph Battat,"China in 2010:Strategic Considerations,"Business Horizons, July-August1987, 2-9;HeidiVernon-Wortzel nd Lawrence Wortzel,"TheEmergence of Free MarketRetailing in thePeople's Republic of China: Promises andConsequences," California ManagementReview, 1987, 29, 59-76;and Dori Yang, "TheNext 'Asian Miracle' MayBe Under Way-InChina," Business Week, November7, 1987,144-145.

13 For a discussion of the general investmentclimate in China, see HarryHarding, "TheInvestment Climate in China," TheBrookingsReview, Spring 1987,37-42.

14 See Joseph Battat, Management inPost-Mao China: An Insider's View (AnnArbor,Michigan: UNIResearch Press, 1986);S. Andors,Workersand Workplaces in Revlutionary China(New York,N.E. Sharpe, Inc., 1977); nd T.Comte, "China:An Overstated Opportunity,"Management Review, January 1987, 16-17.15See Ford Worthy, "Why There'sStillPromise in China," Fortune, February 27, 1989,95-101;"Trying o Manage," The Economist,January 30, 1988, 26-27, and "NoSpeed Limit,"The Economist, March26, 1988, 30-31.16This section is compiled from numeroustrade and industry sources, including: J.Douress (ed.), ExportersEncyclopedia(Baltimore,Maryland:PortCity Press, 1988);Shannon, Endnote 10;and various issues of TheEconomist and Far Eastern Economic Review.

About he Authors Peng S. Chan is assistant professor of strategic management in the School ofBusiness Administration and Economics at California State University,Fullerton. He is also president of The Chan Group which specializes ininternational strategies, investments, joint ventures, and trading with thePacific Rim countries. Dr. Chan received his LL.Bwith high honors from theUniversity of Malaya, and his M.B.A. and Ph.D. in strategic management fromthe University of Texas at Austin.Robert T. Justis is professor of management in the College of BusinessAdministration at Louisiana State University and director of the LSUEntrepreneurship Institute. He specializes in the development and start-up offranchising and entrepreneurial organizations. He actively trains and consultswith managers in numerous organizations. Dr. Justis received his B.S. andM.B.A. fromBrigham Young University, and his D.B.A. from Indiana University.He is the author of Managing YourSmall Business (Prentice-Hall, Inc.). His latestbook, with RichardJudd, is Franchising (Southwestern Publishing Co.).

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FC Mgt in East Asia