Many developing countries face large and growing youth bulges, and with youth unemployment rates prevailing at twice that of the general workforce, there is a pressing need for new job creation. Across the world, 600 million youth will be competing for 200 million jobs in the next decade, and this “demographic time bomb” is not only threatening economic well-being but also generating concern for the potential social unrest it can bring about in countries with weak institutions.
Employing the youth bulge means creating jobs. With nine out of ten jobs created in the private sector, it is clear that private business will need to drive this growth. Franchising and micro-franchising are vehicles that can help bring about increased employment and support entrepreneurship. Currently, the business model of franchising is widely utilized in more developed countries, but very few chains have expanded into frontier markets. There is a clear opportunity to leverage this business model to bring about job creation in the developing country context.
What is franchising?
Franchising is a way to expand businesses through a licensing relationship. Typically, a business (franchisor) can grant a license to a third party individual or company (franchisee) to offer products or services under their brand, and offer them training and support throughout the process. The model has seen great success in the United States, where franchises currently support one in eight jobs. Some of the well-known and largest franchises in the world are fast-food restaurants and hotels from the United States, including McDonald’s and Marriott International.
Micro-franchising, a sub-set of the franchising concept, refers to smaller-scale, and even single-person franchises that distribute standardized branded products and services. VisionSpring is one micro-franchise that typifies this idea in the developing world: it provides its “vision entrepreneurs” with reading glasses, eye charts, and a few days of training. These micro-franchisees then go from village to village selling eye glasses to remote populations that would not have been able to access the product. This is a very much a win-win situation, as the business gets a share of the profit, employs local populations, and provides needed services to remote areas.
Franchising is a means for young, energetic people to create economic activity without a great deal of experience or capital. To be a successful franchisee requires individuals that are hardworking and have the ability to follow through with implementation. These entrepreneurs do not need to face the difficulties of starting a business from scratch but still have an opportunity to run a successful enterprise. Additionally, micro-franchising can expand to rural and hard-to-reach consumers that have largely been ignored by companies due to high delivery costs and their low purchasing power. Micro-franchising can bridge this gap in the distribution chain while creating employment and economic activity.
There are existing examples of franchised businesses driving job creation and social change in the developing world. Living Goods, a micro-franchise based in Uganda, brings sanitary pads, diapers, basic antibiotics, soap, and vitamins to households at below-market prices. In Ghana, micro-franchisees from Fan Milk Ltd. are peddling dairy and milk products to remote areas on bicycles. In India, an enterprise called Drishtee provides its entrepreneurs with a laptop and fingerprint scanner to provide basic banking services to people in rural northeastern provinces who would otherwise need to travel for hours to reach a physical bank location.
Experience has demonstrated that generating jobs from the military or government ultimately leads to economic stagnation. Creating employment through multinational corporations is important, but can fail to reach the “little guys.” Franchising and micro-franchising provide the opportunity to leverage the existing entrepreneurial energy among youth in society to reach more marginalized populations.
Scaling up in developing markets
Dalberg Global Development Advisors conducted a study several years ago to look at franchising models in developing countries, and concluded that micro-franchises face significant obstacles in frontier markets: they lack access to capital, favorable legal and regulatory framework, and technical advisory services needed to scale up and grow.
The lack of profitability and scalability in the past has made banks hesitant to lend to micro-franchised businesses, and because of sophisticated contractual, intellectual property, and regulatory frameworks, many frontier markets score low on “franchising friendliness.” In particular, those micro-franchises that were focused on broader “public goods” such as healthcare and education were severely limited by the requirement to raise grant capital. For franchises to be successful, they needed to develop a self-sustaining model before scaling up.
In frontier markets, this meant that homegrown franchises that adopted simpler traditional formats but were still flexible in customizing were better able to succeed. Locally developed models could tailor their products, lower costs, establish better franchisor-franchisee relationships, and overcome policy environment regulations.
What can aid agencies do?
Local governments, aid agencies, and the private sector can further these entrepreneurial efforts by creating a supportive ecosystem for these businesses to flourish—this would involve development finance institutions and local banks providing capital, establishing supporting legal and regulatory frameworks, and providing technical and legal advisory services. Development finance can provide the needed capital for franchises to develop self-sustaining business models, and with enough time, supplement existing aid efforts in “public good” sectors such as agriculture, education, and healthcare.
Donors will also need to provide the necessary technical and advisory services to aspiring entrepreneurs focused on improving their business skills. The International Finance Corporation’s (IFC’s) SME Toolkit is a great example, designed to help small businesses by providing entrepreneurs with training in business planning, loan applications, managing finances, and many other areas.
In conjunction with financing and advisory help, aid agencies need to establish an encouraging business environment for sustainable activity through transparent regulatory processes. The World Bank Doing Business Report 2016 reveals that the top 30 best performers are not those with little regulation but those with good rules that allow efficient and transparent functioning of businesses and markets while still protecting the public interest.
My friend Andrew Mack at AMGlobal speaks convincingly on the topic, and his presentation is worth watching. Micro-franchising’s potential is bolstered by the great strides made in technological development, increased mobility around the world, and the surge of investor interest in social impact. These factors will drive popularity for micro-franchises around the world, providing companies with valuable information about their next customers while improving livelihoods of those in the developing world.
Published in Forbes.com on June 9, 2016.