Franchising is indeed an increasingly popular way of doing business. McDonalds, KFC, Century 21, Subway, Starbucks, Malan Noodles, Yong He Da Wang ¡ a number of well known foreign franchisers have entered the Chinese market and Chinese companies have since followed suit. However, not all follow traditional franchise methods, by which a company distributes products or services through an independent third-party operator, who is bound by strict guidelines on how to operate the outlet and in exchange for this franchise system pays an initial fee and royalty. For instance, how many McDonalds franchises exist in China? Not a single one. All McDonalds restaurants are corporately owned.
Legal insecurities and immaturity of the market are the main reasons. A trial franchise law has been in place for four years and should be improved after it is initially tested out. The cornerstone of every franchise is the transfer of trade secrets and intellectual property, but it is not clear to which extent the franchisee is allowed to continue using the acquired know how once a franchise is terminated. Also, because many industries, most importantly the retail industry, is not fully open to foreign investment, some foreign franchisees have to operate in a gray area of the law. The franchise law needs to be amended to clarify open issues and to provide a legal environment in which both domestic and foreign franchises can safely operate.
