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Franchising seems to have developed as entitiies felt the need for expansion but had insufficient resources to accomplish their expansion desires on their own. The practice dates back to possibly the Roman Empire and as a business franchise, the Chinese.
In Lloyd Tarbutton's Franchising - The How To Book, the first chain store concept is thought to originate in China during the Warring States period and Qin Dynasty of roughly 200 B.C.. A local businessman named Lo Kass began operating several retail units in China and speculates that franchising possibly started even earlier when rickshaw drivers were granted specific routes.
The governments of Europe used franchising to help rule. Land rights were granted by royalty to highly influential individuals.
Franchising was particularly helpful in expanding chains in a large mass of land. The Singer Corporation, established in 1851 and who manufactured and sold Singer Sewing Machines, is regarded as the most notable early example of a franchise model. Another early example includes the telegraph system which was operated by various railroad companies but controlled by Western Union, and exclusive agreements between automobile manufacturers and operators of local dealerships.
Modern franchising came to prominence with the rise of chains in the United States, particularly franchise-based restaurants. This trend started initially with such companies as A&W Rootbeer with their first soda shop franchise established in Lodi, California in 1919. Their innovation was to adapt the traditional franchise model from the tire business and apply it to soda shops.
This trend continued into the 1930s in which Howard Johnson's began franchising their motel concept. What really gave fuel to the franchise explosion was the building of the Interstate Highway System under President Eisenhower in the 1950s. Kentucky Fried Chicken, McDonald's and many other small chains exploded onto the scene, of which McDonalds has been the most successful worldwide.
Other References:Wikipedia, Franchising. (Note: The Blue MauMau community has determined that there are factual errors in the Wikipedia article.)