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Franchises Densest Where Regulation Toughest

franchise outlets per resident in 2009 by country
Chart: BMM Data:European Fran. Fed, JFA,FCA,IFA, United Nations

LEXINGTON, Ky. — Does government regulation follow when franchising becomes big, or does franchising get big when it is regulated? That's the franchise version of the old adage that asks what came first, the chicken or the egg. One line of reasoning says that franchise investors become more confident and numerous when government intelligently regulates the investment of franchising. The other argues that government only becomes involved because the industry becomes too important and abuse too widespread.

That argument heats up again as the differences between America, Canada, Australia and Europe are highlighted in a new book, The Regulation of Franchising in the New Global Economy. On one side are arguably the most regulated franchise markets in the world, while Europe remains largely self-regulated by franchisor trade associations.

The implication is this — if the libertarian route was taken by North America, Australia and Japan to eliminate all franchise regulation, would the franchisee population be eventually reduced to European levels at half to a sixth of their current size? Is that the free market equilibrium of self-regulated markets? From North American, Japanese and Australian eyes, the self-regulated markets of Europe look like they keep away buyers. Or contrarily, to European eyes, regulation provides false confidence and artificially inflates the franchise buying market.

As franchisees and their advocates consider how best to reform the franchise industry in order to curb widespread abuse, law professor Elizabeth Spencer has come forth with a timely book that addresses the very questions being contemplated by activists and lobbyists. One startling discovery from her chapters that spell out specific franchise regulation of countries is that the toughest franchise regulations in the world are found where franchises are densest per population (see chart).

A member of the state bar of Texas since 1996, Professor Elizabeth Spencer has worked in law in various parts of the world. She practiced law in Dallas and served on the staff of Southern Methodist University. She was the editor for Kluwer Law International in The Hague. Assistant Professor Spencer has lectured in business and franchise law since 2001 at Australia's Bond University, just outside of Brisbane.

BMM: When I went through your book, The Regulation of Franchising, the maps in the middle of the book just really jumped out at me. In the breakdown of countries, you list governments that both regulate their franchise industry and have a franchise association, like the United States. Those are in green. And you mention countries that only self-regulate through trade associations, like Britain and the British Franchise Association. Those countries are yellow on your map.

The presence of franchise-specific legislation and/or a trade association

Map Legend: Green = both a trade association and legislation; Chartreuse = Only some provinces have specific legislation; Yellow = trade association only; Blue = legislation only. From the book: The Regulation of Franchising by Elizabeth Spencer

It seems that if you want to know where in the developed world franchises are densest or where it's booming in newly developing countries, you go to where the toughest franchise regulations are; namely, the U.S., Canada, Australia — those have some of the toughest franchise laws on the planet. What surprised me in your book is how tough China's new franchise laws are.

Spencer: I have to say that in my study I didn't conduct any correlation between the number of franchise systems or the number of units and the extent of the regulation. But I certainly see no evidence that regulation hinders franchising. I would say that the fact that a government actually devotes some attention to franchising is a good sign and hopefully contributes to the health of the industry. I mean, we know that regulation generally has two fundamental purposes really: to improve the effectiveness of markets and to achieve a sort of social-welfare objective to make sure things are fair.

Neither one of those things really should be detrimental to business practices if they're done right.

The head of the British Franchise Association and leader of the French Franchise Federation told me that government intervention in franchising isn't necessary. The French Franchise Federation told me that because it has had close connections with government policy for so long, regulation is totally unnecessary. The British association essentially told me the same thing, that it can handle the policing of the industry itself.

BMM: In Europe, Spain has more density of franchises than Britain and Germany.

Spencer: My sense with Spain is that it has been quite heavily criticized [in Europe] for being overly interventionist and not getting it right. And if you're telling me then that Spain is actually denser than France and the UK, that's really important information.

The problem here is all the statistical noise. If you want to really come up with statistical information about that, how do you control for all the other variables that impact the development of franchising? Still, if you could say all those countries have such successful, rich and dense franchise sectors, and they also have significant regulation, I think that would be really a very important article.

There are so many factors that contribute to the development, or lack thereof, of regulation. There is even ‘fashion’ in regulation.  It may have been more politically palatable to self-regulate through trade associations in England and France when they were getting started, especially given the long tenure and political influence of leaders in the UK and France, both who have spent 18 plus years at the helms of their respective franchise associations.

It does seem that the nature of franchising and the role it plays in the commercial landscape is somewhat different in those countries.

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Don Sniegowski is editor of Blue MauMau, the daily news journal for franchise & small business owners. Call him at +1 (270) 321-1268, tweet @bluemaumau or email