Asean has fallen behind its own goals for building an economic community and should promote proven franchise models if it wants to avoid failing on its SME development objectives.
Today, franchise businesses provide everything from professional services such as legal and accounting practices, to hotel and resort management, education providers, aged-care facilities, transport and logistics, domestic services and specialised capital equipment for industries such as mining and construction. Beyond burgers and fries, this proven business model also delivers economic growth, employment growth, and export income fuelling activity in the small and medium enterprise (SME) sector.
The 2010-15 Asean Economic Community (AEC) blueprint outlines areas of cooperation and integration to create a highly competitive economic region with freer movement of goods, services, labour and capital. The objective is to promote more equitable economic development and fully integrate the region into the global economy.
However, Asean has fallen behind and is unlikely to meet its ambitious 2015 deadline because of challenges slowing negotiations among the 10 member states and domestic political pressures as well as the distraction of alterative trade initiatives.
Asean’s failure to achieve the AEC goals is further hampered by broader economic challenges facing the region including dwindling private investment, weaker exports, decreased household consumption, economic growth at the lower end of the estimates for many members, and growing global uncertainties, particularly around China.
As long as current conditions persist, Asean risks rendering itself irrelevant by focusing on lofty and unattainable goals. It should be looking instead to promote proven strategies that will stimulate economic development, which in turn will lead to greater cooperation among members. Given the unsettled macroeconomic climate, it should also focus on achievable goals with more immediate impact.
One area where Asean could provide more direction and influence is in SME development policy. SMEs are the backbone of the Southeast Asian economy, accounting for more than 96% of all enterprises, between 50% and 95% of all employment, and between 30% and 53% of each nation’s GDP. They are also the largest domestic employers across all sectors.
There is little doubt that a small positive influence in the Asean SME sector will have a more pronounced impact on the region, and there is no better time than now for Asean to focus its effort on this area.
Asean already has a set of guiding principles to promote SME development, but what its bureaucracy lacks is an actionable and achievable plan to deliver economic growth in this sector.
According to Asean, it aims to promote SME development through improving access to finance and technology, strengthening export capacity, utilising ICT solutions, fostering enhanced capacity to innovate, and strengthening human resources development through regional programmes. The strategy is clear but where are the tactics to deliver on these ideals?
The franchise business model is a proven tactic that has been especially potent in delivering growth to the SME sector in countries all around the world. For example, in Australia, 14% of GDP is revenue generated by franchises. The sector also delivers solid employment growth and investment opportunities.
In fact, the well defined and robust franchise business model delivers many other economic benefits, all of which are the type of outcomes that Asean is chasing in its guiding principles for SME development.
At its simplest, franchising is the adoption of an existing business system in another location. The franchisee is backed by the proven nature of the business system being franchised and gains immediate access to technology which often incorporates existing ICT platforms.
Financiers are more inclined to lend to a franchise concept than a new and unproven venture, which means there is more access to finance for franchise systems. From the franchisors’ perspective, the franchise model provides a no-cost or low-cost form of financing to fund growth in the number of outlets or business locations.
The franchising model also allows for the rapid development of export capacity, as franchise systems can be readily licensed to operate in international markets, which in turn are supported by the export of products and services necessary to support the franchise system.
Another benefit of franchising lies in the turnkey solutions it brings to human resources development and product and service innovation. Established and proven business processes in these areas are cascaded through the franchise network, allowing for the rapid adoption of new learning and the sharing of intellectual capital from all participants across the franchise network.
Rather than wasting time and effort attempting to implement novel SME development plans from the ground up, Asean should rapidly embrace the franchise business model and use it as the principal basis for promoting its long-overdue action plan for SME development.
As all entrepreneurs recognise, there is a cavernous divide between strategy and execution, and it seems that Asean for far too long has been focused on strategy at the expense of deliverables. What is needed now is compelling evidence of its ability to execute if Asean wants to maintain relevance in the Asian century.
Dr Nigel Finch CPA is an Associate Professor at the University of Sydney Business School.