In recent months, we have discussed some of the challenges U.S. businesses face when taking franchise operations across international borders. Franchising internationally has been an excellent business decision for a number of organizations, as it is often a logical step to take once the domestic market has become saturated. However, as we have previously mentioned, there are significant risks associated with global franchising. One of the most complicated challenges is ensuring that an international franchise is in compliance with local laws as well as any applicable laws here in the U.S.
The New York Times recently ran an interesting piece about franchising in India and some of the significant legal and financial barriers facing foreign business operators there. India is $500 billion dollar market, growing at a pace of 20 percent annually, but an intimidating system of permits and regulations-as well as an underground web of bribery-is making it difficult for some global players to break into this frontier.
According to the news report, a number of retailers and middlemen have admitted that it is sometimes necessary to pay bribes in order to obtain required licenses in a timely manner in India. This is problematic for a couple of reasons:
1. Profit margins in many franchise industries, such as food service and retail, are thin. So, success can be elusive when there are significant regulatory fees that are padded with bribes.
2. Even if bribery is accepted in the country where a franchise is operating, it is illegal here in the U.S. and American franchises must comply with federal anti-bribery laws while operating abroad.
What franchise business operators may want to take away from this is that it is crucial to do a significant amount of legal, cultural and financial research before expanding internationally. While India is a very fast-growing marketplace, the World Bank's Ease of Doing Business Survey ranks it 173rd out of 185 countries when it comes to starting a business. These issues, however, present only a snapshot of a very dynamic marketplace.
Those who are considering expanding a franchise globally should be sure to seek legal counsel from a franchise attorney to ensure that they are prepared for any contractual or compliance issues that may surface.
Source: Reuters, "Held Up by Red Tape and Graft," Nandita Bose, May 6, 2013