Protectionism in the franchising services industry

Nature

Many countries, particularly developing countries, do not allow the establishment of franchise companies which are fully foreign-owned. Furthermore, a number of developing countries require foreign firms to disclose know-how and technology before franchising operations are permitted. Firms may, for instance, be required to lay open the process technology used in fast-food production. In other cases, the allocation of foreign exchange for remittances of royalties and other earnings is made dependent on how much know-how is transferred to the franchise holder under the franchise agreement.

Background

Protectionism in the franchising services industry emerged as a significant global concern in the late 20th century, when multinational franchise expansion met with restrictive national policies. As international brands sought new markets, governments increasingly imposed barriers—such as equity caps and local content requirements—prompting industry associations and trade bodies to highlight the economic and competitive impacts. Over time, these protectionist measures have been scrutinized in trade negotiations and international forums, reflecting their growing relevance to global commerce.

Incidence

Protectionism in the franchising services industry has become increasingly prevalent, with numerous countries imposing restrictions on foreign franchise operations through regulatory barriers, equity caps, and complex licensing requirements. These measures hinder market entry and limit the growth of international franchise brands, affecting sectors such as food service, retail, and hospitality. The global scale of franchising means that such protectionist policies disrupt cross-border investment, reduce consumer choice, and stifle competition, with significant economic implications for both franchisors and host countries.
In 2022, Indonesia introduced new regulations requiring foreign franchises to partner with local businesses and limit royalty payments abroad. This policy, aimed at protecting domestic enterprises, directly impacted international fast-food chains operating in the country, forcing several brands to renegotiate contracts and adjust their business models to comply with the new restrictions.

Claim

Protectionism in the franchising services industry is a critical problem that stifles innovation, limits consumer choice, and undermines fair competition. By erecting barriers to entry for international franchises, protectionist policies deny local economies the benefits of global best practices and job creation. This short-sighted approach ultimately harms entrepreneurs and consumers alike, perpetuating inefficiency and mediocrity. Urgent action is needed to dismantle these barriers and foster a truly dynamic, competitive marketplace.

Counter-claim

Protectionism in the franchising services industry is hardly a pressing issue. The sector thrives on innovation, adaptability, and global best practices, making protectionist measures largely irrelevant. Market forces and consumer preferences naturally weed out inefficiency, rendering artificial barriers unnecessary. Compared to real economic challenges—like inflation, unemployment, or supply chain disruptions—protectionism in franchising is a minor concern, unworthy of significant attention or policy intervention. Let the market, not protectionism, decide.