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Development Franchising

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Development Franchising as a Social Innovation: When Entrepreneurial Expertise is Lacking Isaac H. Smith David Eccles School of Business University of Utah

Kristie K. Seawright Marriott School of Management Brigham Young University

Contact: Isaac H. Smith; isaac.smith@business.utah.edu; (T) 801-518-2991; 1645 East Campus Center Drive, 22 KDGB, Salt Lake City, UT 84112

Promoting entrepreneurship in “developing” nations has become a popular strategy for alleviating poverty and stimulating economic development (Khandker, 2005). For example, the worldwide proliferation of microfinance institutions is based on the assumption that providing individuals with better access to financial capital will fuel entrepreneurship and microenterprises, providing opportunities for people to work their way out of poverty. The results of such efforts, however, have been mixed (Snow & Buss, 2001), in part, because not all microfinance borrowers have the entrepreneurial skills sufficient to make a microenterprise succeed (Karnani, 2007a). Cross culturally, successful entrepreneurs have been shown to possess a different set of knowledge structures, or mental schema, than non-entrepreneurs (Mitchell, Smith, Seawright, & Morse, 2000). Interestingly, franchisees—often considered to be entrepreneurs (e.g., Baucus, Baucus, & Human 1996; Grunhagen & Mettelstadedt, 2005)—have been found to have entrepreneurship-related knowledge structures more closely resembling non-entrepreneurs than entrepreneurs, implying that the franchise business model may in many ways compensate for a franchisees’ lack of entrepreneurial skills. Applied to a development context, franchising can be employed as a social innovation—compensating for some of the shortcomings of traditional microfinance strategies that often assume a minimum level of entrepreneurial ability in their borrowers. The purpose of this paper is to offer a plausible explanation of why, and a reasoned argument for how, development franchising has the potential to be an important business solution contributing to poverty alleviation and economic development. Drawing on Expert Information Processing Theory (EIPT), entrepreneurship researchers have identified several dimensions of expert scripts (i.e., action-based

knowledge structures; see Mitchell et al., 2000) along which entrepreneurial ‘experts’ (i.e., successful entrepreneurs) differ from ‘novices’ (e.g. non-entrepreneurial managers). Specifically, three types of entrepreneurial expert scripts have been identified in the literature: Arrangements, Willingness, and Opportunity-Ability. Arrangements scripts include knowledge structures related to accessing necessary resources (e.g. financing), protecting ideas, and building networks (Rumelt, 1987; Vesper, 1996). Willingness scripts refer to knowledge structures related to one’s openness to engage in new ventures, explore new opportunities, and assume levels of risk in pursuing new economic relationships (Ghemawat, 1991; Krueger & Dickson, 1993; Krueger & Brazeal, 1994). Opportunity-Ability scripts are knowledge structures associated with new venture scenarios and patterns; the appropriate application of norms, competencies, and abilities required for new venture success; and opportunity-recognition skills (Boyd & Vozikis, 1994; Glade, 1967; Stuart & Abetti, 1990; Vesper, 1996). Cross-cultural entrepreneurship studies have found that successful entrepreneurs and non-entrepreneurs differ along these three dimensions of cognitive processing (Mitchell et al., 2000, 2002). While evidence suggests that individuals develop expert scripts through in-depth experience in a particular domain (Lord & Mahler, 1990; Walsh, 1995), many povertystricken, entrepreneurs in developing economies do not have the luxury of trial-and-error practice in terms of new venture creation. Rather, many of these subsistence entrepreneurs engage in entrepreneurship with a focus on survival, not opportunity pursuit. Consequently, development entrepreneurship is not always accompanied by the expertise typically characteristic of opportunity-seeking entrepreneurial experts. The self-employed poor generally lack specialized skills (Banerjee and Duflo, 2007). Microfinance borrowers are not the visionary, entrepreneurial experts heralded in the western world as champions of job creation (Karnani, 2007b); rather, Karnani (2007a) asserts, “the vast majority of microcredit clients are caught in subsistence activities with no prospect of competitive advantage” (p. 104). We argue that the lack of entrepreneurial expertise among many—if not most— subsistence entrepreneurs (e.g., microfinance borrowers) is a key factor leading to the ineffectiveness of many initiatives that promote entrepreneurship as a source of poverty alleviation. Although microfinance, for example, has been shown to positively impact income, production, employment, and general poverty reduction (Khandker, 2005; Khandeker, Samad, & Khan, 1998), when new ventures fail, borrowers can actually be worse off for having taken a loan (Copestake, Bhalotra, & Johnson, 2001)—they may become overburdened with debt-liability (Rahman, 1999). Promoting entrepreneurship for individuals without sufficient expertise, therefore, might simply be setting them up for failure. For entrepreneurship to be a successful poverty-alleviation strategy, an effort must be made to either support expertise development in subsistence entrepreneurs or compensate for their lack of expertise. A first and obvious step is training. Indeed, business and entrepreneurship training can positively impact microfinance borrowers (Copetake, Bhalotra, & Johnson, 2001), leading to increased profits (McKernan, 2002) and greater asset creation (Swain & Varghese, 2009). However, appropriate training can be expensive for businesses with low profits and small profit margins. As an alternative—or perhaps

additional—approach, we propose that development franchising can help compensate for an individual’s lack of entrepreneurial expertise. In a recent study, franchisees in the formal economy were shown to have cognitive mental schemas more similar to non-entrepreneurial managers (novices) than entrepreneurial experts (Seawright, Smith, Mitchell, & McClendon, forthcoming). Although franchisees were found to have Arrangements scripts similar to entrepreneurial experts, they resembled entrepreneurial novices in their mean levels of Willingness and Opportunity-Ability scripts. Instead of supporting the characterization of franchisees as entrepreneurs, these results paint a picture of franchisees as non-entrepreneurial managers who may have access to capital and a supportive network. The fact that many franchisees succeed in an entrepreneurial environment suggests that the franchise business model may compensate for the expert scripts that franchisees lack. While these findings were based on the study of entrepreneurs and franchisees in the formal economic sector, there is reason to examine the possibility of extending these findings to strengthen entrepreneurial efforts in the informal economy—particularly within the context of poverty. Therefore, we posit that development franchising implemented at a micro-business level can similarly compensate for the lack of skills, knowledge, and entrepreneurial expertise necessary for venture success. For example, entrepreneurs who apply a microfinance loan to an existing business idea (i.e., a development franchise) accompanied by strategic support (i.e, from the franchisor) may have higher success rates than those who choose to start a new venture on their own. In short, for those poverty-based entrepreneurs lacking the entrepreneurial expertise required for successful venture creation, development franchising could be a promising opportunity—contributing to both poverty alleviation and economic development.

References Anderson, J. & Markides, C. (2007). Strategic innovation at the base of the pyramid. MIT Sloan Management Review 49 no. 1: 83-88. Banerjee, A.V., & Duflo, E. (2007). The economic lives of the poor. Journal of Economic Perspectives, 21, 141-67. Baucus, D.A., Baucus, M.S., & Human, S.E. (1996). Consensus in franchise organizations: A cooperative arrangement among entrepreneurs. Journal of Business Venturing, 11(5), 359-378. Boyd, N.G. & Vozikis, G.S. (1994). The influence of self-efficacy on the development of entrepreneurial intentions and actions. Entrepreneurship Theory & Practice, 18(4), 63–77. Copestake, J., Bhalotra, S., & Johnson, S. (2001). Assessing the impact of microcredit: A Zambian case study. Journal of Development Studies 37, 81-100. Ghemawat, B. (1991). Commitment. Cambridge, MA: Harvard University Press.

Glade, W.P. (1967). Approaches to a theory of entrepreneurial formation. Explorations in Entrepreneurial History, 4(3), 245–259. Grunhagen, M. & Mettelstaedt, R.A. (2005). Entrepreneurs or investors: Do multi-unit franchisees have different philosophical orientations? Journal of Small Business Management, 43, 207-225. Karnani, A. (2007a). The mirage of marketing to the bottom of the pyramid. California Management Review, 49, 90-111. Karnani, A. (2007b). Microfinance misses its mark. Stanford Social Innovation Review, summer, 34-40. Khandker, S. (2005). Microfinance and Poverty: Evidence Using Panel Data from Bangladesh. The World Bank Economic Review, 19 no. 2: 263-286. Khandker, S. R., Samad, H. A. & Khan, Z. H. (1998). Income and employment effects of micro credit programmes: Village-level evidence from Banlgadesh. The Journal of Development Studies, 35 no. 2: 96-124. Krueger, N.F.J. & Brazeal, D.V. (1994). Entrepreneurial potential and potential entrepreneurs. Entrepreneurship Theory & Practice, 19, 91–104. Krueger, N.F. & Dickson, P.R. (1993). Perceived self-efficacy and perceptions of opportunity and threat. Psychological Reports, 72, 1235–1240. Lord, R.G. & Maher, K.J. (1990). Alternative information-processing models and their implications for theory, research, and practice. Academy of Management Review, 15, 9–8. McKernan, Signe-Mary. (2002). The Impact of Microcredit Programs on Self-Employment Profits: Do Noncredit Program Aspects Matter? Review of Economics and Statistics, 84, 93-115. Mitchell, R.K., Busenitz, L., Bird, B., Gaglio, C.M., McMullen, J.S., Morse, E.A., et al. (2007). The central question in entrepreneurial cognition research. Entrepreneurship Theory and Practice, 31(1), 1–27. Mitchell, R.K., Smith, J.B., Seawright, K., & Morse, E.A. (2000). Cross-cultural cognitions and the venturecreation decision. Academy of Management Journal, 43, 974–993. Rahman, A. (1999). Micro-credit initiatives for equitable and sustainable development: Who pays? World Development, 27 (1), 67-82. Rumelt, R.P. (1987). Theory, strategy, and entrepreneurship. In D.J. Teece (Ed.), The challenge: Strategies for industrial innovation and renewal (pp. 136–152). Cambridge, MA: Ballinger. Seawright, K., Smith, I. H., Mitchell, R. K., & McClendon, R. (forthcoming). Exploring entrepreneurial cognition in franchisees: A knowledge-structure approach. Entrepreneurship: Theory and Practice.

Seelos, C., & Mair, J. (2007). Profitable business models and market creation in the context of deep poverty: A strategic view. Academy of Management Perspectives, 21, 4, 4963. Snow, D., & Buss, T. (2001). Development and the role of microcredit. Policy Studies Journal, 29 (2). Swain, R.B., & Varghese, A. (2009). Does self help group participation lead to asset creation? World Development, 37, 1674-1682. Stuart, R.W., & Abetti, P.A. (1990). Impact of entrepreneurial and management experience on early performance. Journal of Business Venturing, 5(3), 151–162. Vesper, K. (1996). New venture experience. Seattle: Vector Books. Walsh, J.P. (1995). Managerial and organizational cognition: Notes from a trip down memory lane. Organization Science, 6(6), 280–321.

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