CC BY
10
economy
https://doi.org/10.29013/EJEMS -21-1-11-18
Villalba Patricia, Master of International Trade College of Economics and Management, Northeast Forestry University, Harbin China E-mail: [email protected] Wang Yinan, Corresponding author, Professor of International Trade and Economics, College of Economics and Management, Northeast Forestry University, Harbin-China E-mail: [email protected]
IMPACT OF FOREIGN FRANCHISES ON THE ECUADORIAN ECONOMY
Abstract. Franchises are considered one of the most advanced and efficient business systems due to their great success when expanding businesses or entering them. Ecuador being a developing country has been seen as a fertile economy for the entry of different foreign franchises. In this research, the impact that foreign franchises generate on the country's economy is presented, showing that they not only help to promote a dynamic economy and generate jobs, but also act as a motivation for local businesses to innovate and offer better products and services to the population.
Keywords: Franchising, Economic development, Ecuadorian market, International business, Developing country.
1. Introduction
Over the years, franchises have proven to be one of the most successful economic models on the market, since, being an already established and proven business, it generates greater confidence since the risk of failure is lower. In addition, the basis of this model, which propagates a two-party partnership with the commitment to collaborate for a common purpose (profit), makes this type of business have a high degree of acceptance throughout the world. Foreign franchises have proven to be a very accepted
Section 2. World
business model in developing countries since they not only create jobs but also create the possibility of helping a country's economic growth.
Ecuador, is a developing Latin American country, and represents a great focus for foreign franchises that want to expand their business and enter new economies. For a decade, this country has been seen as a fertile market by investors, which has caused several businesses to expand and establish themselves in it, and consumers have positively accepted this system.
However, this issue has also become controversial, since it is also believed that, when a foreign franchise enters Ecuador, local production, small companies and entrepreneurs that are just starting in the market and seek to attract attention are affected. A franchise is a brand that has its recognition and in many cases that can be a determining factor when choosing between a local or foreign brand, but it is also worth mentioning that the fact of establish greater competition can generate greater concern for the quality of the products or services offered, helping to promote the local standard.
In this research, the author seeks to establish the impact of a foreign franchise on the economy of a country with a developing economy such as Ecuador, and establish certain guidelines that can foresee the positive or negative effects that are generated in the country. The main focus areas of this research will be governed by the economic aspect, analyzing the income that is generated in the country, the influence on job creation, and the contribution to the growth or failure of local brands.
2. Conceptual Framework
2.1. Franchises
The IFA, International Franchise Association, defines franchises as "a method of distributing products or services involving a franchisor, who establishes the brand's trademark or trade name and a business system, and a franchise, who pays a royalty and often and initial fee for the right to do business under the franchisor's name and system" [1].
Feher Ferenz, in 2017, relates franchises with work, since he says that they are synonymous with stability, which also help the prosperity of a country. In addition, he says that the franchise system is very effective in creating jobs swiftly and efficiently, which turns out to be very advantageous for developing countries, since many of this are currently experiencing great growth and therefore hence, a great demand from its population [2].
In Ecuador, Guido Santillan, General Manager of AEF^AN, the Ecuadorian Franchise Associa-
tion, points franchises as a method of commercial expansion where the two parties involved in the business, franchisor and franchisee, support each other in order to replicate the yourself and make it work, all this following the parameters established in the contract [3].
It is important to understand that franchises are not only a business model, but also represent a brand that over time has managed to gain recognition in the commercial field and, therefore, attract various consumers from around the world. A brand represents a doctrine, and this is adapted to the needs of the people who are going to buy it. In developing markets, global brands manage to establish themselves since they present the latest generation products, in addition to bringing innovation and quality. While local brands offer more harmony with the needs and tastes of consumers in their country. So, it is important to have both parties in the market.
2.2. Ecuador's economy
Ecuador is a small country located in South America, which according to the INEC (National Institute of Statistics and Censuses) until July 2019 had a population close to 17.3 million inhabitants. With regard to the economy, it represents an open economy that is highly dependent on the production and export of primary products such as bananas, cocoa, shrimp and flowers. However, the greatest income falls on oil exports. Since 2000, Ecuador has been dollarized, which has made the country "cannot implement an active and independent monetary policy, which limits its ability to respond to external risks, although it does contribute to securing macro-economic adjustment" [4].
The Gross Domestic Product (GDP), being one of the most important macroeconomic indicators, allows the people to understand the behavior of the economy and also know if it is growing or declining. Regarding this, it can be seen that in Ecuador, in 2017 the GDP grew by 2.4% compared to 2016. In 2018 the country's GDP continued to grow with 1.3%. And in 2019, GDP shows a growth of only 0.1% [5].
By 2020, due to the impact of the economic crisis caused by the COVID19 pandemic, GDP evidently showed a decrease in the country. In the first quarter of the year, GDP falls by -1.8%. For the second quarter, months in which the country is kept in quarantine with the suspension of productive activities, the GDP is even more affected, decreasing by 12.4%. However, for the third quarter, months in which the country resumes economic activities, a growth of 4.5% is seen compared to the second quarter, but with the same contraction of 8.8% compared to the third quarter of 2019 [6].
By 2021, the World Bank estimates a reestablishment of the economies, including the Ecuadorian, however, it will continue to be one of the lowest GDP in the South American context and, therefore, it shows to be one of the hardest hit economies in 2020.
2.3. Franchises in Ecuador
In Ecuador, the franchise system has been applied for several years, with the international Martinizing franchise being the first to arrive in the country in 1967. From then on, several franchises have entered the market and over the years they have managed to establish themselves in it, in addition to gaining the approval of the consumer, who undoubtedly represents one of the most important factors for a franchise to succeed or fail. In general, the success of this sector has been based on its dynamism, its rapid expansion, the generation of new jobs and the drive that the development of the country's economy represents. Reasons why several investors, businessmen and entrepreneurs have decided to opt for this model either to transform their businesses and seek their national and international expansion, or to bring different successful concepts that have already been developed in another country.
Currently, of the total number of businesses that operate as a franchise in the country, it is estimated that there are around 300 franchises in Ecuador. 86% are foreign, while only 14% are national brands. Of this total, 50% of franchises come from the United States, and the other 50% come mainly from countries such as Colombia, Argentina, Venezuela, Swit-
zerland and Spain, among others [7]. On the other hand, the main places where the largest and most notable number of franchises are housed are in Quito, Guayaquil and Cuenca, the three most important cities in Ecuador.
The franchise model, in this country, is generally distributed in three main sectors: Retail, Services and Food, and without a doubt, the latter is the one that generates the most income. According to AE-FRAN, in 2020, 50% of the franchises present in Ecuador correspond to restaurants. The sale of fast food in Ecuador is one of the markets with the greatest emphasis for franchises, so the company Int Food Services, which manages the foreign franchise KFC and national GUS, had revenues of more than 250 million dollars in the year 2019. It is estimated that the Fast-Food sector alone raises more than 500 million dollars [8].
3. Methodology and data
3.1. Methodology
The methodology used for the present work is based on an exploratory research, that is, it is based on the interpretation or observation of the current situation ofthe study context for its subsequent analysis and the eventual obtaining of concrete deductions about the subject. For this purpose, interviews were used, obtaining qualitative results. On the other hand, a quantitative descriptive research applied through surveys was carried out. In addition, both primary and secondary sources were used to obtain the information. The primary sources were obtained through books, scientific journals, official documents from public and private institutions, degree works. While the secondary sources were obtained from newspaper articles and information on websites in Spanish and English.
3.2. Limitation
The information was collected in Ecuador during 2020, however, it is important to add that, at the time of starting this investigation, there were not yet all the harmful effects of the COVID19 pandemic. During the entire year 2020, both Ecuador, like all countries in the world, were severely affected due to the seri-
ous economic situation that the pandemic caused. It is remarkable to see that this year's data shows a decline, but it is expected that with the resumption of economic activities, the economic outlook for 2021 will change and improve. For this reason, the analysis was done between the years 2017 to 2020 with a focus on the economic sector of Ecuador. Only people of Ecuadorian nationality were taken into account to participate in the surveys.
In general, three methods were used to collect the information necessary for the investigation. First, surveys were conducted in order to provide a more up-to-date picture of what people think about the topic being analyzed. For this, the website Survermonkey.com was used, and different social networks were used to distribute the surveys. It was decided to use this method since, in general, people feel more willing to give their opinions anonymously and online, than in person. Second, experts in the investigated topic were contacted to conduct online interviews, in order to provide current, more accurate and reliable information. The questions asked were focused on the current situation of franchises
18-25
in Ecuador and its economy, in addition to the possible influence of these on economic activity. Third, the collection of data through the different primary and secondary sources available both physically and electronically, this in order to analyze existing information, since in this way it is possible to see the changes that have occurred over the years with respect to the subject analyzed.
4. Analysis and Results
4.1. Surveys
Most of the people who took part in the survey were in the range of 26 to 40 years of age (Figure 1), which represents an adult and economically active population, this means that they have or have had employment and have received money in exchange for providing their services, whether in the public or private sector. In addition, they are people who have completed the school and have possibly already completed their third level studies. These characteristics allow the participants to be characterized as people who are capable of acquiring products and services based on their tastes, personal experiences and conveniences.
26*40
41-60
61 Or more
Foreign
LocëI
52%
37%
29%
2%
Figure 1. Range of age of the participants
61%
39%
Figure 2. Preference between foreign and local products or services
When choosing a product or service, 61% of (Figure 2). This may be due to the fact that many people choose foreign brands over national ones of the foreign brands that are offered in the market
have several years of experience, which has generated a high degree of recognition, generating more confidence on the part of the consumer. In addition, currently people are very interested that the product or service that is acquired is of good quality. In this regard, Crespo, in his research about
franchises in Ecuador, states that for a brand to become exportable and acceptable in the world market, it must comply with extremely high-quality parameters and guidelines, giving it a good degree of quality [9], and, in effect, make it more accepted by consumers.
Figure 3. The presence of foreign brands affects the growth of national brands
The survey showed that 71% of Ecuadorian citizens think that the presence of foreign brands affects the growth of national brands (Figure 3), which is relevant when examining the results of the previous
question. More than 60% of citizens choose to buy brands from abroad, and it is something of general knowledge in the country. There is still a distrust on the part of people towards the local.
Figure 4. The presence of foreign business supports the economy
However, 53% ofpeople believe that the presence of foreign companies in the country effectively supports the country's economy (Figure 4). This suggests a positive perception about the foreign by consumers and is represented in the high demand that exists in Ecuador for foreign products or services. It is also because the "Franchises in turn create more jobs, and society starts to see them as something beneficial" [10].
4.2. Interviews
The interviews were conducted both with experts on the subject of franchises in Ecuador and the most relevant conclusions are presented below.
Those interviewed agree that franchises have presented a favorable growth in the market in recent years
and this has been largely due to the construction of shopping centers, which have undoubtedly been one of the main factors for expansion and income of several franchises to the country since they offer the necessary conditions for this sector to prosper.
The international franchises that currently praise in this sector come from the United States and this is because of the fact that Ecuador is dollarized, which generates more security in the negotiations since the same currency is maintained. In addition, also brands from Colombia, Mexico, Venezuela, among others, are very well positioned in the market since they have managed to win the approval and preference of Ecuadorian consumers.
The generation of employment and the reduction of poverty, in addition to the economic independence that is generated when obtaining a franchise, have been the main factors to give an important boost in the franchise sector in Ecuador. It is undeniable to note the contribution of franchises in the Ecuadorian economy, especially when talking about employment, since they generate direct employment to a large number of Ecuadorians at the same time that they move millions of dollars of money, allowing fluidity in the country. Also, the generation of indirect employment by hiring services or acquiring products was highlighted, which helps several people to sustain their homes.
Finally, it was stated that foreign franchises are indeed seen as something positive for both entrepreneurs and the country, however, it is expected that local franchises will continue to develop, not only nationally, but also internationally. Furthermore, it is considered that the presence of foreign franchises has helped to generate innovation in local businesses, by the fact of wanting to stand out in the market and improve their sales, the quality of both local products and services has been improved. Therefore, this has made the consumer experience much better, which helps national brands continue to expand and franchise their businesses.
4.3. Data collection
Foreign or local brands
According to a study carried out by Nielsen, in general, in developing countries, local brands are considered to have greater affinity with respect to their personal needs and tastes, while foreign brands are chosen because they consider themselves to be better in innovation or have better quality [11], which could indicate the reason for the preferences of consumers when purchasing products and services.
Foreign Franchises create competition and bring knowledge
Steven Michael, in his research on franchising as an economic development strategy, says that franchising creates competition, which helps reduce costs, but improves quality and variety, which also
encourages local businesses to seek stand out and, therefore, offer a better product or service to the consumer, which evidently increases efficiency and quality standards in all sectors of the country [12].
In the same way, it is evident that foreign franchises provide a vast knowledge to developing countries, since when entrepreneurs from different countries enter, they collaborate with experience in the economic sector, debugging, optimizing and cloning successful business models, serving as a reference for local entrepreneurs seeking to establish themselves in the Ecuadorian market and allowing sales to grow, and consequently, improving profits [13]. With all this, it can be seen that franchises are an engine to spread prosperity and fight poverty.
Job generator
Franchises undoubtedly create jobs, not only directly but also indirectly, and underemployment, since the employees of these businesses are not the only beneficiaries. There are also the people involved in transportation, the distribution of supplies, workers who are part of different companies or businesses that have agreements with these franchises to supply products or services, which shows that franchises provide work to many types of people, with different degrees of preparation, and even without it. "Through their everyday ordering of supplies or the use of local services, the franchise is putting money back into the community and supporting the local economy" [14].
It is important to add that if a franchise is successful, it will seek to continue expanding in the country and reach more cities, which creates the need for more inputs and services so that they can function effectively, and this promotes the hiring of more personnel, evidencing the generation of jobs for Ecuador [15].
Impact on the National Economy
Franchises in Ecuador are an independent entity that has local tax obligations; therefore, they have to comply with the payment of taxes, fees and special contributions, which represent tax revenues for the State. This money raised supports the local economy, since they serve to finance public needs [9].
Likewise, another benefit of franchises is the continuous preparation they provide to their workers, which makes "the local economy gains more skilled and semi-skilled workers that earn an income and create an output of labor. Other consumers then take advantage of the employee's training by purchasing a service or product that they created" [14].
Unemployment in Ecuador
According to data from the National Institute of Statistics and Censuses (INEC), in 2018, Ecuador presented one of the lowest unemployment rates with 3.7%, and by the end of 2019, unemployment rose 0, 1 percentage points, standing at 3.8. Unfortunately, due to the difficult situation experienced by the COVID19 pandemic, the unemployment rate in 2020 will undoubtedly increase, but it is expected that with the activation of the economic sector, this
will change. It is even considered that the franchise system will be one of the most adopted types of business after the pandemic, as it represents a business with a lower risk of failure.
5. Conclusion
Franchises are a business model that, due to their high profitability and the low risk they represent, help boost the country's economy. Ecuador, being a growing economy, has benefited from the entry of various foreign franchises since they not only increase the supply of jobs, lifting many people out of poverty, but also the creation of new local businesses that thanks to the experience of this system can consolidate their brand in the local market, they also offer superior quality products and services, improving the country's standard and pay taxes that help pay for public expenses of the State.
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4. WTO, "Trade Policy Review", Report by the Secretary, Ecuador, 2019.
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