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Jan, 16 2010

Employment generator

Franchising has been one of the most successful ways of doing and strengthening business in both, developed countries and emerging markets. Worldwide, franchising has been effective in ensuring sustainable business growth and generating new incomes throug

Franchising has been one of the most successful ways of doing and strengthening business in both, developed countries and emerging markets. Worldwide, franchising has been effective in ensuring sustainable business growth and generating new incomes through large employment opportunities. While at one end, it leads in producing entrepreneurs as business owners, on the other it creates tremendous employment opportunity at all levels.

As a form of business organisation franchising is increasingly recognized as:

  • A means of nurturing and developing the entrepreneurial talent through the transfer of technology and knowledge.
  • Developing business capacities by linking matured and young businesses together.
  • Promoting best business practices.
  • Attracting the informal sector business to the formal sector.

In addition, the strengthening of business linkages resulting from franchising at national and regional levels, as well as internationally, will allow economies of developing countries to better size up to the challenges and opportunities of globalisation, raising quality standards through skills transfer and competition.

Franchising is relatively a much nascent concept in India and has picked up belatedly. However, it has to go a long way if compared with advanced economies like of US, Japan and Canada. To highlight the impact of franchising in boosting economies and in employment creation, given alongside (box item) are excerpts from an IFA authorised study conducted by Price Water & Coopers for the period from 2001 to 2005 and published in 2008:

The statistics reveal the power of franchising;  almost 75 per cent of it is from business format franchising, which is largely service-oriented franchising. The franchising sector is much ahead in employment creation than many other prominent industries across the US. This shows how franchising can create a revolution in employment generation.

The Indian economy, for more than a decade, has witnessed the growing influence of the service industry which contributes more than 50 per cent of the GDP. The service industry is largely a non gender biased industry resulting in creation of tremendous employment opportunities for women as well. This has played a significant role in not only enhancing family income, but also creating a lot of potential for pro-women businesses to grow and consequential self employment opportunities, such as in food outlets, child oriented products and services etc.

SME Business Development Model

SMEs around the globe in both, emerging as well as developed economies are the largest employment generator. The greatest strength of SME development model lies in its contribution to increasing the success rate of SME franchisees models vis-à-vis the independent SME business outlets.

New entrepreneurs (franchisees) will be able to enter the market by investing in a system with a proven concept and enjoy the support of their respective franchisors. This support and experience greatly help in reducing the risks of financial institutions in lending to franchisees. And this addresses one of the pressing constraints of SMEs worldwide, that is, access to finance. Franchising is, therefore, a successful business format for SME development and can proliferate exponentially.

Franchising can significantly contribute to economic development, particularly through promotion and development of the SME sector in India, thereby resulting in huge employment generation. Furthermore, it has the potential of exerting a powerful multiplier effect in developing the Indian economy. Hence, franchising must be embraced as a tool for private sector development in India.

Over 85 to 90 per cent of private businesses in developing economies are SMEs, who have played a vital role in the social and economic development of the nations. In India, SMEs contribute almost 70 per cent of the gross domestic product (GDP) and employ millions of people across the nation. SMEs contribute to the Indian economy:

  • Approximately 80% of industry establishments;
  • Approximately 40% of industry output;
  • Approximately 35% of manufacturing sector;
  • Approximately 35% of domestic export;

And SMEs play a significant role as:

  • The largest employment generator;
  • Help government in equal distribution of wealth in society, and
  • Innovator of economic development process through their direct involvement in SME business as proprietors/owners.

In fact, SMEs form a major source of employment, who contribute significantly by providing job opportunities to poor strata of society spread across the country. They also help in national integration through resource endowments which tend to unite varied  class of people in groups or conglomerates.

Conclusively, SMEs promotes a culture of entrepreneurship and skilled workmanship  because of their low entry barriers.

SMEs have several potential advantages, viz;

  • They tend to use less capital per worker than large firms do, not only because of differences in the types of products made, but also because of differences in the know-how and technology used to make the same products.
  • They use resources that otherwise might not be drawn into the development process, e.g. ,
    • Semi-skilled or non-skilled workers, who acquire excellence on the job,
    • Small savings of entrepreneurs who may not use the banking system but may invest in their own firms.
  • They occupy a significantly useful niche in industrial structure, subcontracting with large firms and engaging in small batch production, or finishing operations complementary to large scale industry.

The experience in most developing economies has been that SMEs generally lack the technological and managerial capacities, leading to high failure rates of enterprises. However, the SME sector in India is highly diversified by ownership, type of enterprise and stage of development. It is against this background that a more focused approach to SME development, targeting particular niche areas of intervention where the business development service providers can take leadership and contribute with a measurable impact, needs to be identified. One such area is franchising.

I am sure that with the growth of franchising as the leading way of doing business, the SME sector will get a tremendous boost in getting organised resulting in potential economic development. It is encouraging that the Government of India and the state governments have also recognised the same and have come out with many favorable schemes to boost SMEs.

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