FFrraanncchhiissiinngg iinn IInnaaddeeqquuaatteellyy PPrrootteecctteedd MMaarrkkeettss Inhibiting Factors in Entrepreneurial Market Entry by Harry Abughazala Submitted in partial fulfilment of the requirements for the degree of Master of Business In the School of Management and Entrepreneurship at Unitec New Zealand Franchising in Inadequately Protected Markets: Inhibiting Factors in Entrepreneurial Market Entry Declaration Name of candidate: Harry Abughazala This Thesis is submitted in partial fulfillment for the requirements for the Unitec degree of Master of Business. Candidate’s declaration I confirm that: · This Thesis/Dissertation/Research Project represents my own work; · The contribution of supervisors and others to this work was consistent with the Unitec Code of Supervision. · Research for this work has been conducted in accordance with the Unitec Research Ethics Committee Policy and Procedures, and has fulfilled any requirements set for this project by the Unitec Research Ethics Committee. Candidate: Date: 15 June 2006 Supervisors’ declaration I confirm that, to the best of my knowledge: · The research was carried out and the work prepared under my direct supervision; · Except where otherwise approved by the Board of Postgraduate Studies of Unitec, the research was conducted in accordance with the degree regulations and program rules; · The contribution made to the research by me, by other members of the supervisory team, by other members of staff of Unitec and by others was consistent with the Unitec Code of Supervision. Supervisors’ comments (optional): Franchising in Inadequately Protected Markets: Inhibiting Factors in Entrepreneurial Market Entry Acknowledgements I would like to take this opportunity to extend my thanks to the Unitec School of Management and Entrepreneurship for giving me the appropriate environment to complete this research. I would also like to extend my sincere appreciation for the participants who have enriched the research with their experience and insights during the interviews. My special appreciation is to my supervisors Prof. Howard Frederick and Dr. Alex Maritz. I am greatly indebted to their continued support, encouragement and professional guidance throughout the research process. I really appreciate the special interest shown by both supervisors on the subject matter of the research. Harry Abughazala 18/07/2006 Page i Franchising in Inadequately Protected Markets: Inhibiting Factors in Entrepreneurial Market Entry Abstract As a result of the growing trend in globalisation, Western fast food entrepreneurs are seeking opportunities to expand their operations in the Kingdom of Saudi Arabia. Saudi Arabia, as a developing country, has limited protection of intellectual property, and has limited franchise regulations. Yet, Saudi Arabia is attracting huge foreign direct investments, and fast food franchising is an exponentially growing sector. This study explores the prospects of expanding or starting a fast food business in Saudi Arabia after joining the World Trade Organization. It also explores the barriers, risks and disincentives related to operational quality as well as intellectual property protection. Finally, it explores possible entrepreneurial modes of entry in a similar emerging market. The study concludes that the fast food market in Saudi Arabia is very lucrative as compared to other markets in the region. Several legal and operational barriers are identified. However, neither is reported as insurmountable or negatively affecting entrepreneurial fast food expansion. The preferred mode of entry varies with different entrepreneurs. A well-established entrepreneurial fast food business, with critical firm- specific-advantages may well adopt a mode of wholly-owned subsidiaries locally, and a joint venture mode overseas. Harry Abughazala 18/07/2006 Page ii Franchising in Inadequately Protected Markets: Inhibiting Factors in Entrepreneurial Market Entry Table of Contents 1 Introduction and Context ..................................................................................................... 1 1.1 Overview.................................................................................................................... 1 1.2 Objectives.................................................................................................................. 1 1.3 Aims of the Research................................................................................................ 4 1.4 Outline ....................................................................................................................... 4 2 Prospects, Barriers and Modes of Entry in Literature ........................................................ 5 2.1 Introduction................................................................................................................ 5 2.2 Dimensions of Research........................................................................................... 5 2.3 Core Concepts .......................................................................................................... 6 2.3.1 Franchising................................................................................................ 7 2.3.2 Franchisor.................................................................................................. 8 2.3.3 Franchisee................................................................................................. 8 2.3.4 Area Development .................................................................................... 9 2.3.5 Master Franchisee .................................................................................. 10 2.3.6 Strategic Alliance..................................................................................... 10 2.3.7 Joint Venture ........................................................................................... 11 2.3.8 Licensing ................................................................................................. 11 2.3.9 Internalisation vs. Externalisation ........................................................... 11 2.3.10 Fast Food ................................................................................................ 12 2.3.11 Value Chain ............................................................................................. 12 2.3.12 Transnational Corporation ...................................................................... 12 2.3.13 Intellectual Property (IP).......................................................................... 13 2.3.14 The Entrepreneur .................................................................................... 13 2.3.15 Emerging Market ..................................................................................... 14 2.4 Prospects of KSA Market Growth ........................................................................... 15 2.4.1 WTO Membership ................................................................................... 16 2.4.2 Wealth ..................................................................................................... 17 2.4.3 Strategic Location.................................................................................... 17 2.4.4 Culture ..................................................................................................... 18 2.4.5 Population................................................................................................ 18 2.4.6 Ownership Requirement ......................................................................... 19 Harry Abughazala 18/07/2006 Page iii Franchising in Inadequately Protected Markets: Inhibiting Factors in Entrepreneurial Market Entry Table of Contents 2.4.7 Profit Remittance..................................................................................... 20 2.4.8 Taxes ....................................................................................................... 20 2.4.9 Fast Food Franchising ............................................................................ 21 2.4.10 Consumer Food Service......................................................................... 21 2.5 Barriers to Entry ...................................................................................................... 22 2.5.1 Service-Specific Barriers......................................................................... 23 2.5.2 Cross-Cultural Barrier ............................................................................. 24 2.5.3 Political Risks .......................................................................................... 25 2.5.4 Quality Barriers........................................................................................ 26 2.5.5 Intellectual Property Barriers................................................................... 31 2.6 Modes of Entry ........................................................................................................ 35 2.6.1 Overview.................................................................................................. 35 2.6.2 Franchising.............................................................................................. 36 2.6.3 Licensing ................................................................................................. 37 2.6.4 Wholly-Owned Subsidiaries .................................................................... 37 2.6.5 Joint Venturing ........................................................................................ 38 2.7 Theoretical