DSpace at VNU: The franchising road to integration and sustainable development: the role of Vietnam''sfranchise law

DSpace at VNU: The franchising road to integration and sustainable development: the role of Vietnam''''sfranchise law tài l...

THE FRANCHISING ROAD TO INTEGRATION AND SUSTAINABLE DEVELOPMENT: THE ROLE OF VIETNAM’S FRANCHISE LAW Nguyen Ba Birth * Andrew Terry * Franchising and Sustainable Development Franchising Franchising is, in the words of the Australian House o f Representatives Standing Committee on Industry, Science and Technology, "an increasingly popular form o f economic organisation providing an alternative means o f expanding an existing business or an alternative means o f entering an industry"1 It is a method o f business operation, which has revolutionised the distribution o f goods and services in virtually all industry sectors and has transformed the business landscape o f most countries2 Franchising has been explained as a form o f economic organisation in which: the franchisor, holding property rights over a marketing system, business service or product (identified by a brand name or trademark) enters a contract or agreement with the franchisee and grants, under certain conditions, the right to use a business brand name or trademark and the right to produce or distribute the franchisor’s product or service3 It originated in the mid nineteenth century as a form o f exclusive branded distributorship agreements - today known as product and trade name franchising characterised by an independent sales relationship between supplier and dealer in which franchised dealers concentrate on one company’s product line and to some ! ibid Andrew Terry and Nguyen Ba Binh, 'Vietnam's New Regulatory Regime for Franchising' (2009) LawAsia Journal 82 The I louse o f Representatives Standing Committee on industry, above n 403 VIỆT NAM HỌC - KỶ YẾU HỘI THẢO QUỐC TẾ LÀN THỨ T extent identify their business with that o f the supplier1 This form o f franchising includes product franchising in which the franchisee has the role as a distributor, either wholesaler or retailer, for a specific product and processing or manufacturing franchising in which the franchisor grants an essential ingredient or know-how to the franchisee However, the significant development and innovation in franchising occurred a century later, in the 1950s, when the current iteration o f franchising business fo rm a t franchising - evolved While product and trade nam e franchising is a relatively unsophisticated form o f franchising essentially comprising branded distribution arrangements, business format franchising - the major contemporary form o f franchising - is a sophisticated business relationship In a business format franchise, the franchisor provides the franchisee with not only a branded product and/or service but also an entire business model - an overall image and a method o f doing business in accordance with a proven business system, and operational and managerial systems supported by standards, training and ongoing assistance2 Business format franchising is a "symbiotic relationship in which the needs o f the franchisor and the franchisee blend in a commercial marriage o f convenience"3 which merges "the seemingly conflicting interests o f existing businesses with those o f aspiring entrepreneurs in a single process that promotes business expansion, entrepreneurial opportunity and shared cost and risk"4 The franchisor benefits from rapid expansion o f its system without having to directly invest in and manage to outlets, which are financed and managed by the franchisee, and from ongoing franchise fees and, in many systems, income from product sales and service supplies The franchisee benefits from the goodwill in the brand, and from the provision o f a complete business system including initial and ongoing training and support, marketing, and economies o f scale5 - factors which can deliver higher profit margins, lower failure rates, easier entry into the market place, and lower capital requirements Andrew Terry and Des Giugni, 'Franchising' in A ndrew Terry and Des Giugni (eds), Business and the Law (Cengage Learning, ed, 0 ) , p 401 Andrew Terry, 'Business Format Franchising: The Cloning o f A ustralian Business' in Business Format Franchising in Australia (Robert Burton Printer Pty Ltd., 1991), p 3 Terry and Giugni, above n 5, p 398 US House o f Representatives Committee on Small Business, 'Franchising in the u s Economy: Prospects and Problems' (1990), p 13 Andrew Terry, 'Small Business, Service Exports and the Role o f Business Format Franchising' (Paper presented at the Asia Pacific International Business: Regional Integration and Global Competitiveness, Perth, Western Australia, June 20-23,1995) 40 THE FRANCHISING ROAD TO INTEGRATION F ranchising in Developing Countries Franchising has proved to be "a viable method o f distributing goods and services which can have a positive influence on economic developm ent"1 The 1997 Consultative Survey on Franchising in the APEC Member Economies stated that: By supporting and encouraging the development o f business format franchising, APEC governments can help the growth o f small and medium enterprise The franchising track record is full o f examples o f small businesses that grow and in turn foster other small businesses Franchising is a particularly effective tool for economic development and international integration in developing countries3 and is a proven strategy for SME development It may be the most effective method for developing countries to build a services oriented economy4 Through the international expansion o f foreign franchise systems, developing countries are introduced not only to new products, services and technologies but also to training, business advice and operational and managerial experience in relation to those systems Foreign franchisors provide franchisees not only with system know-how but also with a range o f management skills The most enduring legacy of the expansion of international franchise systems to developing countries is nevertheless the development o f domestic franchise sectors The international systems stimulate entrepreneurial activity and are the catalyst for the development of domestic franchise systems not only for the benefit o f local entrepreneurs and their franchisees but also for consumers and society generally5 For these reasons, franchising is a particularly attractive business strategy in developing countries While franchising faces increasing saturation in developed countries o f North America (the u s and Canada) and Western Europe (particularly Germany and the Martin M endelsohn, The Guide to Franchising (Cassell, 5th cd, 1992) Asia Pacific Econom ic Cooperation, 'Consultative Survey on Franchising in APEC Member Economies' (1997) IIan Alon, 'Global Franchising and Development in Emerging and Transitioning Markets' (2 0 ) 24 Journal o f Macromarketing 156 Nguyen Ba Binh and Andrew Terry, 'Franchising in Developing Countries' (Paper presented at the 2012 SIBR Conference on Interdisciplinary Business & Fxonomics Research, Bangkok, Thailand, 7-9 June 2012) Andrew Terry, 'A Comparative Analysis o f Franchise Regulation in the Asia-Pacific Region' (Paper presented at the LAWAS1A Conference, Christchurch, N ew Zealand, 4-8 October, 0 ) 405 VIỆT NAM HỌC - KỶ YẾU HỘI THẢO QUỐC TÉ LÀN THỬ T UK), it is still relatively untapped in developing countries' With four fifths o f the w orld’s population and three fifths o f the w orld’s natural resources2, the developing countries are attractive destinations for foreign franchisors The u s Department o f Commerce has recently estimated that the developing countries will account for over three quarters o f the w orld’s expected trade growth in the next two decades3 While franchising is an invention o f western capitalism which increasingly dominates the market places o f North America and W estern Europe, its most exciting future is likely to be in the developing countries o f Asia where its business development potential is already having great influence China is a good example Franchising was introduced to China only in the late 1980s, yet China today is the world’s most franchised country with respect to the num ber o f franchise systems with over 4,000 systems4 by the end o f 20095 Franchising in Vietnam Franchising is a relatively new butsteadily developing strategy in Vietnam, which is one o f the w orld’s newest franchise countries At the time when franchising was becoming popular in many developed countries, Vietnam was at war The Anti-French w ar started in 1945 only a few days after the establishment o f the Democratic Republic o f Vietnam (today the Socialist Republic o f Vietnam) and ended in 1954 The Anti-American war started in 1954 and ended in 1975 when the Socialist Republic o f Vietnam was reunited Franchising could not develop in this l.I la n Alon and D ianne H B W elsh, 'G lobal Franchising in E m erging and T ransitioning Economies' (2002) 2(1) International Journal o f Business and Economics 332; Dianne H.B W elsh, Ilan A lon and C ecilia M Falbe, 'An E xam ination o f International Retail Franchising in Emerging M arkets' (2006) 44(1) Journal o f Small Business Management 130; Olafemi A yopo O lotu, 'R einventing B usiness G row th through Franchising in D eveloping E conom ies: A Study of the Nigerian Fast Food Sector' (2011) 3(1) International Journal o f Marketing Studies 162 Man Alon, Dianne H.B Welsh and Cecilia M Falbe, 'Franchising in Emerging Markets' in Ilan Alon (ed), Franchising Globally (Palgrave Macmillan, 2010) 11 ibid This is the num ber o f systems recorded by the China Chain-Storc and Franchising Association (CCFA), but the number of franchise systems officially registered with C hina’s Ministry o f Commerce is significantly less Zhiqiong June Wang, The Impact o f China's Regulatory Regime on Foreign Franchisor's Entry and Expansion Strategies (PhD Thesis, The University o f New South Wales, 2010), p 4; Yun Zhang, The Information Imbalance in the Franchising Relationship: a Best Practice Model fo r Prior Disclosure and an Evaluation o f China's Regulatory Regime (PhD Thesis, the University o f New South Wales, 2011), p 336, 406 THE FRANCHISING ROAD TO INTEGRATION environment, nor in the closed, subsidised, bureaucratic, and centrally planned economy which existed following reunification and in which private enterprise had no place The introduction o f the Doi Moi policy in 1986, which moved Vietnam to a socialist oriented market economy and opened the door to the outside world including western countries, led to an economic environment in which franchising could operate Franchising did not appear in Vietnam until the mid-1990s when the business environment became more attractive to foreign investors because o f many economic and legal reforms and its deeper international integration, particularly after the lifting o f the u s commercial embargo in 1994 As in most countries, franchising first appeared in Vietnam through the expansion o f foreign franchisors The pioneer franchisors, including Jollibee (from the Philippines), Lotteria (from South Korea) and KFC (from the US), came to Vietnam in the period 1996-1997 However, in the first 10 years following the introduction of franchising, there were only 23 franchise systems which, with few exceptions, owned and operated their outlets rather than franchised them Franchising has nevertheless experienced steady development since 2006 when Vietnam introduced dedicated franchise regulations which for the first time recognised franchising as a discrete business method In the five years following the introduction o f Vietnam’s Franchise Law, the num ber o f franchise systems increased over fourfold, from 23 to 96 Although the size o f franchising sector in Vietnam is still limited, and most system outlets are owned and operated by franchisors, Vietnam is a promising franchise market A high and stable GDP growth rate (at around eight percent in recent years)1, a highly literate and young population, political stability, wide international integration, and extensive legal reforms driven by WTO accession commitments - in particular the introduction o f a dedicated franchise law - has made Vietnam an attractive country for franchising In the words o f the General Director o f KFC Vietnam, "Vietnam is not only a promising market for fast food but also for franchising in other areas"2 Although V ietnam ’s economy was also affected by the global financial crisis in 2007, the country weathered the storm well with 5.32 percent growth in 2009, 6.78 percent growth in 2010, and 5.89 percent growth in Ỉ (Source: Vietnam’s General Statistics Office [Tong cuc thong ke Viet Nam]) See generally McKinsey, 'Growing up Fast: Vietnam Discovers the Consumer Society' (2010) 655>, last accessed 20 June 2012 Bao Vietnamnet [Vietnamnet Newspaper), 'KFC Exec Speaks on the Growth o f Fried Chicken' (2006) , last accessed 30 June 2010 407 VIỆT NAM HỌC - KỶ YÉU HỘI THẢO QUỔC TẾ LẰN THỨ T The Need for a Franchise-Specific Law Although the D oi M oi reforms led to a market environm ent in which franchising could operate, the development o f the franchise sector was constrained by the lack o f a clear legal framework Until the introduction o f the new regulatory regime, franchising was not recognised as a discrete business relationship and, in a country where the general rule is that anything not being specifically permitted is not allowed1, franchise development was not practicable As explained by Vision and Associates, a Vietnamese law firm specialising in franchising, "without a legal frame o f reference Vietnamese authorities simply consider a franchise agreement as a trademark licence, technology transfer contract, and/or service agreement Such agreements will therefore be subject to different regulations under current Vietnamese law"2 Instead o f entering the sector through a franchise agreement, an intending franchisor generally entered through one or several other contracts which was like "hammering a square peg into a round hole"3 discouraging both potential domestic and foreign franchisors These problems drew attention to the urgent need to enact a franchise-specific law for Vietnam as a necessary prerequisite for the development o f a Vietnamese franchise sector Accompanying this pressure was the fact that Vietnam, as part o f its preparatory steps for WTO accession, faced the urgent need to m odernise its laws to provide a legal framework more consistent with international practice and more favourable for business These factors led to a dedicated franchise regulation being introduced as a part o f the new 2005 Commercial Law, which replaced the 1997 Commercial Law The necessity for the new 2005 Com m ercial Law was acknowledged by the Government: Many new commercial activities have just appeared or been favoured by businesses, however, there has not yet specific regulations on them whereas general regulations under the 1997 Commercial Law could not be applied to them (for example, franchising and sale o f goods through good exchange)4 ibid Vision & Associate, 'Laws For Franchising Scattered A m ongst Many Decrees', Vietnam Investment Review December 2003 , last accessed 20 A ugust 2010 Giles Cooper, 'Chalk Needed to Outline Franchising Fields o f Play' (2007) Chinh phu Viet Nam [Vietnam's Government], 'To trinh ve Du an Luat Thuong mai (Sua doi) [The Report of the Project of Amending the Commercial Law]' (October 2004), p 408 THE FRANCHISING ROAD TO INTEGRATION The introduction of Vietnam’s Franchise Law - the first clement o f which was the inclusion o f a Chapter in the 2005 Commercial Law - was a response to the practical requirement for a d e ar legal framework for the development o f franchising This was acknowledged by the Government when submitting the eighth draft o f the 2005 Commercial Law to the Parliament1 Although there is not any statement o f purpose, in the proposal document2 for the 2005 Commercial Law, the Government acknowledged that the introduction of dedicated franchise regulations was to encourage the development of franchising and to ensure legal rights and obligations o f parties in franchise relationships ’ V ietn am ’s Franchise Law V ietnam ’s Franchise Law provides a clear and dedicated legal framework for franchising in Vietnam It comprises four components - the 2005 Commercial Law providing a framework for regulating the franchise relationship; the 2006 Decree Making D etailed Provisions fo r the Implementation o f the Commercial Law with Respect to Franchising Activities’, a Ministry of Industry and Trade Circular Providing Guidelines on Procedures fo r Registration o f Franchising Activities; and a Minister o f Finance Decision Providing the Regime fo r the Collection and Payment, Management and Use o f Charges fo r Commercial Franchising Registration addressing registration and prior disclosure which are key features o f the regulatory regime Recently, some articles in Decree 5.5 have been amended by Decree 120 (in 2011) of the Government Amending and Supplementing Administrative Procedures Stipulated in a number o f Decrees o f the Government Detailing the Implementation o f the Commercial Law Vietnam is one o f over 30 countries which have introduced a franchisespecific law to supplement the underlying commercial laws The Franchise Law adopts an increasingly familiar regulatory model It stipulates comprehensive franchisor prior disclosure with moderate relationship obligations A "light touch" registration regime, which was included in the Franchise Law was virtually removed by Decree 120 in 2012, being retained onlv for international franchisors franchising into Vietnam4 ibid, p This is the document explaining the rationale for the introduction o f the law and the main issues addressed in it Chinh phu Viet Nam IVietnam's Government], above n 4, pp 16-17 However, the annual report o f franchisors is still required to support data collection 409 VIỆT NAM HỌC - KỶ YẾU HỘI THẢO QUỐC TÉ LÀN THỬ TU Prior disclosure - which addresses the information imbalance inherent in the typical franchise relationship - is generally considered as the key to franchise regulation Consistent with international best practice, Vietnam also uses prior disclosure as its central regulatory tool The prior disclosure provisions are broadly similar to the requirements o f those countries which adopt a comprehensive disclosure regime including the u s , Australia, China, M alaysia, and also UNIDROIT’s M odel Franchise Disclosure Law Relationship/conduct issues arising from the power imbalance are also addressed in Vietnam ’s Franchise Law, particularly through imposing moderate restrictions on the rights and obligations o f the parties in the franchise relationship Vietnam, like many regulated countries, provides restrictions on unilateral termination by the franchisor and follows the common form ula o f allowing termination only on prescribed termination events and the giving o f a default notice and the opportunity for the franchisee to remedy its breach Vietnam also mandates several rights and obligations o f both franchisors and franchisees Vietnam’s Franchise Law generally subjects both foreign and domestic franchisors to the same regulatory regim e1 which is consistent with, and indeed required by2, international best practice Previous restrictions as to business forms and the extent o f foreign capital ownership in foreign invested enterprises involving franchising have been lifted as consequence o f Vietnam ’s W TO accession commitments Vietnam’s regulatory regime for franchising is broadly consistent with international best practice It is, in the words o f Baker and M cKenzie lawyer Giles Cooper, "modem and well-drafted, and balances commercial freedom and protection o f franchisees"3 Cooper further states that "new specific domestic legislation and recent W TO commitments on franchising have laid the groundwork for a likely explosion in activity in this dynamic sector"'1 However, the gaps in the protection provided for franchisees, and the ambiguity o f several provisions, are issues o f concern for both franchisors and franchisees The lack o f unification and However, under Decree 120 (in 2011) the registration obligation remains only for foreign franchisors which raises a concern as to a unified regim e for both dom estic and foreign franchisors and seems inconsistent with Vietnam’s WTO accession com mitment Vietnam ’s WTO accession commitments, Vietnam Investment Review, ’Franchise Operations Face Serious Challenges' vir.com.vn/Client/VIR/index.asp?url=content.asp& doc=12077> ibid 10 Bao, Vinh, 'Subway Da Den [Subway Aready Arrived]' (2010) Binh, Nguyen Ba and Andrew ferry, 'Franchising in Developing Countries' (Paper presented at the 2012 SIBR Conference on Interdisciplinary Business & Economics Research, B angkok, Thailand, 7-9 June 2012) Chau, Ngoc, '80% Doanh nghiep nho va vua dang kho khan [80 Percent of Vietnam's Small and Medium Businesses are Meeting with Serious Problems]' (2008) 10 Chinh phu Viet Nam [Vietnam's Government], 'To trinh ve Du an Luat Thuong mai (Sua doi) [The Report of the Project of Amending the Commercial Law]' (October 2004) 11 Cooper, Giles, 'Chalk Needed to Outline Franchising Fields of Play' (2007) 12 Dung, Le, 'Gloria Jean's Nan giai voi cua Viet Nam [Gloria Jean's Coffees Meets with Difficulties in Vietnam]' (14 May 2012) Nhip cau Dau tu [Investment Bridge] 13 Euromonitor, Market Sizes (2011) 14 Frazer, Lorelle and Bill Merrilees, 'Pho24 in Vietnam: A Case Study of a Newly Em erging A sian Franchise' (Paper presented at the 2009 IC SB W orld Conference, Seoul, Korea, -2 June 2009) 15 ỉỉien , Thu, 'K inh doanh nhuong quyen thuong mai tai V iet N am se tang 35% [The Sales G row th o f Franchising in Vietnam will Increase to 35% ]' (2009) 16 McKinsey, 'Growing up Fast: Vietnam Discovers the Consumer Society' (2010) 17 Mendelsohn, Martin, The Guide to Franchising (Cassell, 5th ed, 1992) 423 VIỆT NAM HỌC - KỶ YẾU HỘI THẢO QUỐC TÉ LÀN THỨ TƯ 18 Mitchell, Heneage, 'Vietnam Embraces Western Coffee Shop Culture' (2010) 19 Nathan, Greg, Profitable Relationships (2008) 20 OECD, (2001), 'Business Views on Red Tape: Administrative and Regulatory Burdens on Small and Median Sized Enterprises' 21 Olotu, Olafemi Ayopo, 'Reinventing Business Growth through Franchising in Developing Economies: A Study of the Nigerian Fast Food Sector' (2011) 3(1) International Journal o f Marketing Studies 162 22 Phong, Nguyen Dong, Nhuong quyen thuong mai tai Viet Nam [Franchising in Vietnam] (Nha xuat ban Dai hoc Kinh te quoc dan [The National Economics University's Publishing House], 2009) 23 Terry, Andrew, 'Business Format Franchising: The Cloning of Australian Business' in Business Format Franchising in Australia (Robert Burton Printer Pty Ltd., 1991) 24 Terry, Andrew, 'A Comparative Analysis of Franchise Regulation in the Asia-Pacific Region1(Paper presented at the LAWASIA Conference, Christchurch, New Zealand, 4-8 October, 2001) 25 Terry, Andrew, 'Small Business, Service Exports and the Role of Business Format Franchising' (Paper presented at the Asia Pacific International Business: Regional Integration and Global Competitiveness, Perth, Western Australia, June 20-23,1995) 26 Terry, Andrew and Nguyen Ba Binh, 'Vietnam's New Regulatory Regime for Franchising' (2009) LawAsia Journal 82 27 Terry, Andrew and Des Giugni, 'Franchising' in Andrew Terry and Des Giugni (eds), Business and the Law (Cengage Learning, ed, 2009) 28 The House of Representatives Standing Committee on Industry, Science and Technology, Finding a Balance: Towards Fair Trading in Australia (May 1997) 29 Thong tan xa Viet Nam [Vietnam News Agency], 'KFC Khai truong nha hang dau tien o Hanoi [KFC Opened the First Outlet in Hanoi]' (2006) 30 US House of Representatives Committee on Small Business, 'Franchising in the u s Economy: Prospects and Problems' (1990) 31 Vietnam Investment Review, 'Franchise Operations Face Serious Challenges' 32 Vision & Associate, 'Laws For Franchising Scattered Amongst Many Decrees', Vietnam Investment Review December 2003 424 THE FRANCHISING ROAD TO INTEGRATION ;3 W ang, Zhiqiong June, The impact o f China's Regulatory Regime on Foreign Franchisor's Entry and Expansion Strategies (PhD Thesis, The University of New South Wales, 2010) '4 Welsh, Dianne II.B., [Ian Alon and Cecilia M Falbe, 'An Examination of International Retail Franchising in Emerging Markets' (2006) 44(1) Journal o f Small Business Management 130 :5 Zhang, Yun, The Information imbalance in the Franchising Relationship: a Best Practice Model for Prior Disclosure and an Evaluation o f China's Regulatory Regime (PhD Thesis, the University of New South Wales, 2011) 425 ... Amending the Commercial Law] ' (October 2004), p 408 THE FRANCHISING ROAD TO INTEGRATION The introduction of Vietnam’s Franchise Law - the first clement o f which was the inclusion o f a Chapter in the. .. Tape: Administrative and Regulatory’ Burdens on Small and Median Sized Enterprises’ 422 THE FRANCHISING ROAD TO INTEGRATION Asia Pacific Economic Cooperation, 'Consultative Survey on Franchising. .. 424 THE FRANCHISING ROAD TO INTEGRATION ;3 W ang, Zhiqiong June, The impact o f China's Regulatory Regime on Foreign Franchisor's Entry and Expansion Strategies (PhD Thesis, The University of