Microfranchising and necessity entrepreneurs

Abstract

I study the effect that miniaturized franchising opportunities (microfranchise) can have on necessity entrepreneurs in less developed countries. The capacity of necessity entrepreneurs to self-supply entrepreneurial inputs may be smaller than for opportunity entrepreneurs, leading to poor outcomes in independent businesses. A microfranchise provides entrepreneurial inputs such as branding, marketing, supply chain logistics, product design, best practices, and reduced demand uncertainty. Franchisor-supplied inputs may substitute for individual disadvantages, leading to greater business profit. Using a unique data set from Bangladesh, Ghana, and Guatemala, I test this hypothesis. Through control function models, I find evidence that necessity entrepreneurs under perform their peers in independent business and that the average returns to microfranchising are larger for necessity entrepreneurs. Results suggest that franchisor’s temporary provision of specific capital acts similar to a start-up capital loan, drawing important comparisons with microcredit.