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JMD
30,4 Franchising and small
medium-sized enterprises (SMEs)
in industrializing economies
402
A Saudi Arabian perspective
Received 29 January 2009
Revised 6 June 2009
Muhammad Asad Sadi
Accepted 4 May 2010 Department of Management & Marketing,
King Fahd University of Petroleum & Minerals, Dhahran, Saudi Arabia, and
Joan C. Henderson
Nanyang Business School, Nanyang Technological University, Singapore

Abstract
Purpose – The purpose of this paper is to examine the extent of interest in franchising among small
medium sized enterprises (SMEs) in the Kingdom of Saudi Arabia and to identify attitudes towards the
mode of operation’s success held by practitioners.
Design/methodology/approach – A literature review is presented to explain franchising and the
reasons for its adoption by SMEs. Secondary information obtained from published sources forms the
basis for a summary of conditions in Saudi Arabia. In addition, a survey questionnaire was
administered to a sample of managers in the Eastern Province of Saudi Arabia to determine their
views.
Findings – Franchising is deemed to be a suitable business format for SMEs and franchising support
systems contribute to its success, although some problems are acknowledged. There are good
prospects for further growth, but also obstacles to overcome.
Research limitations/implications – Resource constraints limited the scale and scope of the
survey and there is a need for further studies of more executives in other locations.
Practical implications – Policy makers in Saudi Arabia are now emphasizing the importance of
both franchising and SMEs. This study affords insights into how practitioners see franchising and
may help to inform decision and strategy making in the public and private sectors.
Originality/value – Most franchising studies have been conducted within American and European
environments and there have been few attempts to examine the issue within the context of Saudi
Arabia. This study therefore advances knowledge and understanding about a neglected area of
commercial activity in an industrialising economy such as that of Saudi Arabia.
Keywords Small to medium-sized enterprises, Franchising, Saudi Arabia, Business performance
Paper type Research paper

1. Introduction
The subject of franchising in Saudi Arabia has attracted interest within government
circles and the media, although there are few academic studies. The benefits of
franchising for all parties are recognised, but its limitations and questions about the
Journal of Management Development
Vol. 30 No. 4, 2011
pp. 402-412 The authors acknowledge the support and encouragement received by King Fahd University of
q Emerald Group Publishing Limited
0262-1711
Petroleum & Minerals, Dhahran (Saudi Arabia) for using its facilities in the preparation of this
DOI 10.1108/02621711111126855 paper.
factors, which determine success among small medium sized enterprises (SMEs) are Franchising in
often neglected. This paper examines the significance of franchising in Saudi Arabia industrializing
and attitudes towards its contribution to business success among SMEs. The intention
is to improve understanding of the dynamics underlying the increasing popularity of economies
franchising among Saudi Arabian SMEs and suggest ways of making the most of
future opportunities.
403
2. Theoretical background
SMEs exhibit a range of operational and development modes which encompass family
businesses, start ups and spin-offs. Forms on international partnership include
licensing, joint ventures and assorted strategic alliances. However, franchising remains
a popular choice and it is a route for SME business expansion around the world
(Keating, 1989; Sanghavi, 1998). Resource scarcity theory has been applied in
arguments which contend that franchising is a means to overcome the problem of
scarce resources such as those of human, financial, information and knowledge capital
(Oxenfeldt and Kelly, 1969). Managerial expertise is usually in short supply because of
the lengthy time it takes to acquire and high acquisition costs (Combs and Ketchen,
1999; Combs et al., 2004). Franchising allows immediate access to management talent
(Brickley and Dark, 1987), especially in cases of second-generation franchising. Here,
the franchisor transfers a more comprehensive business package to the franchisee,
which includes managerial skills and specialist staff training (Stuart and Brownmen,
2001).
Another reason for SMEs to choose franchising is that it provides insights into local
needs based on detailed knowledge of local market conditions (Minkler, 1992).
Franchising can also furnish growth capital which otherwise might not be available
(Dant and Paswan, 1998; Kaufmann and Dant, 1996) and some researchers propose
that capital scarcity, independent of other resource scarcities, propels franchising
(Combs and Ketchen, 2003). However, Norton (1995) claims that capital scarcity
combined with the need for managerial expertise and market information is the
primary driver. The significance of each type of resource scarcity is thus a topic for
debate (Dant, 1995; Shane, 1996) and it seems likely that all have a part to play.
Lafontaine (1992) and Lafontaine and Kaufmann (1994) maintain that capital
scarcity motivations are often combined with those, which are agency related.
According to agency theory, one party delegates authority and responsibility to
another party known as the agent to accomplish aims. The parties may have divergent
goals and it is therefore incumbent on the principal to monitor the second party, limit
unintended information flow, establish specific and requirements for performance at
the outset and endow managers with sufficient autonomy (Eisenhardt, 1989; Stuart and
Brownmen, 2001). Such a relationship is evident in franchising and can help to avoid
problems of moral hazard (Caves and Murphy, 1976; Rubin, 1978).
With regard to costs, Shelton (1967) argues that franchising can help business units
to achieve higher profits than their non-franchised counterparts, even in the same
chain. Norton (1998) notes that franchised operators may create greater sales volumes
than non-franchised while Krueger (1991) suggests that franchising reduces payroll
costs. Franchisor capital investment may also be relatively modest in comparison with
organic or acquisition methods of expansion, enabling SMEs to generate profits from a
low cost base (Sanghavi, 1998).
JMD Overall, franchising affords several benefits for SMEs looking to develop. For
30,4 franchisees, it supplies goodwill associated with the franchise name, access to cheaper
goods and services and professional guidance about operational practices (Zimmerer
and Scarborough, 2002; Justis and Judd, 2004). Support covers location selection
(Mendelsohn, 1998), design (Gower, 1995), finding a contractor (Mendelsohn, 1998), and
staff recruitment and training (Barrow and Golzen, 1990). It also embraces purchasing
404 and financial systems, market data, promotional and pricing policies and funding
(Barrow and Golzen, 1990).
Other commentators warn that SMEs should exercise caution when adopting
franchising because of the demands of monitoring and quality control. There are
travel, legal and regulatory, termination and geographic distance costs to be met and
having franchisees overseas or in remote rural areas can augment expenses
(Fladmoe-Lindquist and Jacque, 1995). Communicating specific knowledge to
franchisees and distributing it system-wide is also costly (Jensen and Meckling,
1995). Franchisees usually cannot afford to arrange additional training for their
managers who cannot be compelled to share knowledge gained through experience.
The wisdom generated through franchising may thus enrich individual units alone so
that firm ownership is preferred (Bradach, 1997; Dant and Nasr, 1998; Darr et al., 1995).
Other potential disadvantages are free riding, non-compliance and compromising
on quality and thereby tarnishing the brand. Free riding means the franchisee seeks to
maximize profits without giving due regard to the franchisor reputation (Brickley and
Dark, 1987) and non-compliance refers to situations where franchisees do not adhere to
franchisor policies (Bradach, 1997). Quality of products and services can be jeopardized
if there is deviation from proscribed standards (Michael, 2000). Disappointments and
failures in franchising are thus possible (Bates, 1998; Stanworth et al., 2004) and it may
not be the best expansion route for SMEs (Sanghavi, 1998). Questions of the merits and
drawbacks of franchising from the perspective of SMEs in Saudi Arabia are explored
in the survey conducted for this paper, the results of which are discussed after a
summary of franchising among SMEs in the country.

3. Franchising and SMEs in Saudi Arabia

Franchising in Saudi Arabia has grown considerably over the last ten years when
measured by total sales and market share. Its presence is especially marked in the
fast food sector where franchised business accounts for 35 to 40 per cent of the
total. Well known international brands include Burger King, Hard Rock,
McDonald’s, and Pizza Hut. Retailers are represented by the likes of Harvey
Nichols, Debenhams and Saks Fifth Avenue and hotels by Sheraton, Hilton and
Four Seasons. Avis, Hertz and Budget are prominent in the car rental industry.
Some local franchisers related mainly to food and beverages are Al-Tazaj, Kudu,
Zahoor Alreef, Hot and Crispy, Othaim Corner, Sweet Corn and N&A (Saudi
Commerce and Economic Review, 2004).
Franchised SMEs in the wholesale and retail, real estate and restaurants and hotel
industries employ large numbers as detailed in Table I who comprise over 60 per cent
of the respective workforces. Some 540,000 proprietorships are involved and
franchising makes up 35 per cent of family owned SMEs (SAMA, 2003). Revenues are
also substantial, growing at an annual rate of 10 per cent in the case of local franchises,
which make up 60 per cent of the total, the remainder dominated by American and
European companies (US-Saudi Arabian Business Council, 2003). Franchised Franchising in
businesses are dispersed through out Saudi Arabia, but 75 per cent of SME industrializing
franchises are found in the Eastern Province, Riyadh, Makkah and Madina areas
(Malik, 2004; Radwan, 2002; Sugair, 2002) where consumer purchasing power is economies
highest.
The spread of franchising in Saudi Arabia can be attributed to several causes. Many
Saudi businessmen have ample capital and a craving for entrepreneurship, but do not 405
always have the vision to devise a totally new business concept and are reluctant to
venture out on their own. This leads to opportunities for franchising which has been
especially popular with the younger generation. Choosing prime locations near
shopping centres or sites of heavy pedestrian traffic flows has boosted business and
there is a large and relatively inexpensive work force of migrant workers from the
developing world. Overseas franchisors have modified their offerings and operational
tactics in accordance with the culture and religious background of the Saudi people in
numerous ways such as the use of halal meat, separation of the sexes and a prohibition
on advertising with any sexual connotations.
Despite these positive circumstances, which have meant that expansion in
franchising has outpaced that of alternative modes of operation, SMEs in general face a
host of difficulties (Estimo, 2004; Sajini, 2004). They suffer from restricted access to
short and long term finance, a detrimental business environment, managerial
inefficiencies, an underdeveloped information technology sector, insufficient market
information and unfavourable market conditions (Kurdi, 2002; Ramady, 2005; Saudi
Arabia General Investment Authority, 2004). In terms of franchising specifically, many
SME owners and executives have no formal training in marketing and distribution and
possess limited knowledge about how to identify and attract foreign companies
offering partnerships.
Problems partly arise from the Saudi Arabian economic policies embarked on in the
early 1970s when preferential treatment was given to the petrochemicals and
manufacturing sectors. These industries received sizeable subsidies in the rush to
develop the Saudi economy and the bureaucratic fascination with the oil boom and its
giant corporations led to the neglect of SMEs (Ramady, 2005). Government has
overlooked SMEs with regard to various incentives while commercial banks have
viewed them as high-risk borrowers (Shalaby, 2004). An additional weakness is the
fact that a large proportion of managers are expatriates who, because of short-term
employment contracts and visa constraints, play a circumscribed role in long term
industry development (Sugair, 2002).

No employed Wholesale and Retail Real estate Restaurants and Hotels

Under 10 548,245 19,478 69,835

10-49 196,672 10,151 55,963
50-99 83,448 1,059 4,372
Over 100 220,390 1,366 33,242 Table I.
Total 1,048,755 32,054 163,412 SMEs and franchising
sectors in terms of
Source: Central Department of Statistics (Saudi Arabia), 2003. Available at present from CDS employment
JMD Official attitudes are, however, changing and there is recognition of the contribution
30,4 that SMEs can make, especially to employment. It has been estimated that for every SR
one million (US$267,000) invested in SMEs, around 28 new jobs are generated
compared to just one job in large firms (Central Department of Statistics, 2003). Given
the concerns about over-dependence on uncertain petrochemical revenues and
mounting youth unemployment in Saudi Arabia (EIU, 2009), the authorities are paying
406 close attention to franchising and SMEs and this is reflected in the Seventh Five Year
Plan. Several schemes have been initiated, illustrated by a new national tourism plan
due for publication in 2009 which focuses on providing jobs for Saudis and
encouraging SME activity in the field of tourism and hospitality (AME Info, 2009).

4. Research methodology and data collection

A survey using convenience sampling was chosen as an appropriate research method
(Zikmund, 2004) and executives of SMEs, employing locals and expatriates of mixed
cultural backgrounds and operating through franchising in the Eastern Province of the
Kingdom, were targeted. Businesses included travel agencies, accommodation and
catering facilities, transportation companies and retailers. Respondents were managers
and senior managers from assorted departments who were deemed to have sufficient
understanding and exposure to evaluate the performance of the franchise system and
its future prospects.
A questionnaire was prepared which contained a series of questions and attitude
statements, requiring Likert scaled answers, designed to test the following hypotheses.
These hypotheses are derived from the preceding reviews of the academic literature
and state of franchising and SMEs in Saudi Arabia.
H1. Franchising as a business format has proved successful for SMEs in Saudi
Arabia.
H2. The support system offered contributes to SME success in franchising.
H2.1. External support made available through franchising contributes to
success.
H2.2. Professional management support made available through franchising
contributes to success.
H2.3. Start-up support made available through franchising contributes to success.
H2.4. Assistance with the selection of the site and geographical location made
available through franchising contributes to success.
H3. There are elements of franchising that cause dissatisfaction or problems for
SMEs.
H3.1. Inflexibility in contractual agreements and business decisions causes
dissatisfaction.
H3.2. Conflicts over continued support from franchisors cause dissatisfaction.
H3.3. Conflicts over hiring of employees cause dissatisfaction.
The questionnaire was developed in English and then translated in Arabic in order to Franchising in
minimise any confusion over terminology. Both versions were distributed by post
accompanied by a letter explaining the purpose of the study, proffering reassurance
industrializing
about anonymity and promising summary results if requested. A total of 400 economies
questionnaires were mailed and 243 forms were returned, a response rate of 61 per cent;
of these, 179 were fully completed and usable and the remainder was discarded.
Statistics were produced using regression, reliability and factor analysis. The 407
correlation coefficient was applied to measure the co-variation between variables.
The correlation coefficient ranged from þ 1.0 to 2 1.0, the value þ 1 being perfectly
positive linear and 2 1 being perfectly negative linear. The composite reliability test was
considered necessary in light of the multi-item instrument. Results of the analyses are
discussed in the next section and are a foundation for the subsequent recommendations.

5. Data analysis and findings

Profile of respondents
Of the 179 respondents, 86 per cent were male and 83 per cent were Saudi nationals.
Most (79 per cent) were aged between 21 and 40 and over half had a university degree
with an additional 13 per cent having a postgraduate qualification. A majority of 60 per
cent recorded a monthly income of SR5,000 (US$1,335) to SR15,000 (US$4,005),
consistent with averages for SMEs and family businesses, and 15 per cent earned in
excess of this amount.

Regression results
Given that both the dependent and independent variables were assessed according to
Likert scales, regression analysis was conducted to test the three hypotheses. The first
two hypotheses expect that franchising will be seen to have a positive impact on
success while the third is concerned with more negative aspects. From the results of the
multiple-regression, shown in Table II, it can be deduced that franchising as a business
format for SMEs and franchising support systems have positive betas as hypothesized.
They have significant relationships with SME success with values of 0.043 and 0
respectively, which are less than 0.05. Hence, the two hypotheses are supported, as is
the third, which has a negative beta and significance value of 0, indicating that
franchising problems can undermine SME success in Saudi Arabia.

Factor analysis
The use of factor analysis was deemed necessary to reduce the large number of variables
to a few interpretable dimensions. Franchising as a business format for SMEs was
compressed into five variables, which formed a single factor. The eigenvalue and
proportion of the variance explained by the single factor are depicted in Table III.

Dependent variable: SME success

Independent variables Beta t-value Sig. Table II.
Hypotheses testing
Franchising as a business format for SMEs 0.153 2.046 0.043 regression results
Franchising support systems 0.37 4.594 0.00 [standardized regression
Franchising problems 20.328 2 3.941 0.00 coefficient (t-value)]
JMD
Component 1
30,4
Franchising is not for SME owners 0.571
Franchising is only good for big companies 0.698
Franchising is exploitative 0.623
Franchising destroys local SMEs 0.723
408 Franchising does not allow any freedom to local franchisees 0.736
Eigenvalue 2.265
Proportion variance explained 45.293
Cumulative variance explained 45.293
Table III. Reliability 0.623
Franchising as a business
format for SMEs Note: The scale for the above five items were reverse coded for analysis

The variable Franchising support systems was represented by three items, and the
result of the factor analysis is reported in Table IV. Similarly to the previous construct,
a single factor emerged out of the analysis and this had an eigenvalue of 2.25 and
proportion of the explained variance of 74.99 per cent as can be seen in Table IV.
For franchising problems, five items formed one factor and the result of the factor
analysis is found in Table V. The eigenvalue explained by this single factor is 2.234
and the variance is 44.752 per cent.

Reliability assessment
Regarding the reliability of the constructs which were checked for their internal
consistency, franchising as a business format for SMEs and franchising problems have

Component 1

Franchising leads to more employment for the young 0.871

Franchising leads to better employment standards 0.891
Franchising develops local managerial talent 0.834
Eigenvalue 2.250
Table IV. Proportion variance explained 74.999
Franchising support Cumulative variance explained 74.999
systems Reliability 0.830

Component 1

Franchising is not appropriate for some types of business 0.647

Franchising only benefits the franchisors 0.617
Franchising destroys local culture 0.747
Franchising is very restrictive 0.587
Franchising is bad for society 0.731
Eigenvalue 2.238
Proportion variance explained 44.752
Table V. Cumulative variance explained 44.752
Franchising problems Reliability 0.689
Cronbach alphas of 0.623 and 0.689 respectively. According to the guideline of Franchising in
Nunnally and Bernstein (1994), the value of 0.70 or above is a satisfactory reliability industrializing
coefficient; however, sometimes slightly lower thresholds are cited (Koch et al., 2005;
Graham and Nafukho, 2007; Chang and Lin, 2007). Hence, the two constructs can be economies
said to exhibit an acceptable degree of reliability. For the franchising support systems,
its reliability score has a single component and Cronbach alpha of 0.830. Since the
Cronbach alpha is more than 0.70, the factor is also judged reliable. 409
6. Discussion and recommendations
The survey results in combination with the analysis of published material yield
evidence that franchising is an appropriate and profitable way of doing business for
SMEs in Saudi Arabia. There are still barriers to overcome, as revealed in section 3, but
there are also opportunities which must be seized on in an intensely competitive
international environment. The following measures are proposed to help Saudi SMEs
realize their potential in the franchising arena.
.
Clear definition and articulation of goals, missions and visions.
.
Commitment to high quality products and service.
. Cultivation of good negotiation skills.
.
Building of an effective team of employees.
.
Constant upgrading of worker skills.
.
Full exploitation of IT capabilities.
.
Maintenance of high ethical standards
.
Support from government.

Although SMEs in Saudi Arabia do not have the advantages of economies of scale and
scope and high investment value, there are some possibilities for infiltrating foreign
markets through the franchising mode. Such activity would be assisted by the
adoption of the policies listed in the following.
.
Developing business links and relationships
.
Concentrating on a market orientation attitude
.
Searching for market opportunities
.
Updating operational facilities
.
Securing capital

It would seem more realistic to focus initially on the Gulf region due to existing
political and economic ties and socio-cultural and religious affinities. At the same time,
cultural differences could be used to advantage in markets beyond the Arab world
where there might also be a place for differentiation strategies grounded in Islamic
values.

7. Conclusion
Primary and secondary data presented in the paper thus corroborate the original
hypotheses, which franchising as a business format has proved successful for SMEs in
Saudi Arabia in ways, which are assisted by its inherent support system. At the same
JMD time, problems can arise attributable to relations between franchisors and franchisees
30,4 and employment issues. Despite some limitations, it seems that franchising is a viable
mode of operation and development, which is becoming more established among Saudi
Arabian SMEs. There are also good prospects for further expansion, especially if
government backing is forthcoming. However, there is an urgent need for more
research into how SMEs grow through franchising and the effective management of
410 the process, especially within the context of Saudi Arabia and the Middle East.
Detailed exploration of the factors which facilitate and inhibit effectiveness will help
inform appropriate strategies to maximise potential benefits for businesses involved.

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Corresponding author
Muhammad Asad Sadi can be contacted at: [email protected]

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