Research blog

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Development aid is complex and does not always run smoothly. To improve our work, we can learn from theory and from practice. Firstly, OFoundation aims to understand how we can optimize our investment by looking at how business operated and succeeded in the past. Secondly, OFoundation recognizes the growing amount of literature that discusses micro-franchising. On this page, we analyze globally the importance of micro-franchising as an addition to development aid from a theoretical perspective.

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Why does micro-franchising work?

 

Patricof and Sunderland (2002) recognize that young entrepreneurs in developing countries face major problems. While growing companies in developing countries can work with long term capital investment, young entrepreneurs find it difficult to access capital, while investment is particularly vital to them to be able to compete. Financing solutions must be found to satisfy the needs of a variety of companies. It is this problem that has been marked by major organizations all over the world, and it is known as, for instance: SME-finance gap, credit gap, or the missing middle.

 

Micro-finance and other systems
An important and famous financing mechanism to allow small enterprises to grow is micro-finance (not to be confused with micro-franchise) (Grameen Bank, 2012). Loans are provided as unsecured loans, which means no contracting and no pledge to some estate. The system once seemed promising; foundations all over the world replicated the method. This led to an unprecedented growth of Micro Finance Institutions (MFIs). These grew with an average of 21 percent between 2003 and 2008 (Gonzalez, 2010). However, the system is not perfect, and empirical results are mixed (Feigenberg, Field & Pande, 2011). Some borrowers fall into vicious cycles of dept. The reason for this is that not everyone has the competence to manage their own company. Furthermore, because of the small nature of the loans, the transaction costs for MFIs are high. If we can find ways to provide financial support for businesses in a more profitable and less risky manner, this can increase the preparedness of lenders to invest.

 

Micro-franchising
An idea that has found increasing support from funds is micro-franchising. Successful small and medium enterprises expand by realizing new branches in surrounding regions. Lehr (2008) describes how this process, called micro-franchising, can be used to accelerate the economy in developing countries. It allows companies that have proved successful to collaborate with motivated colleagues to improve their business. This is possible with smaller capital requirements and comparable growth rates, compared to traditional investments in a single location. Micro-frachising and micro-finance in general are different from normal financing methods because of the scale: they are substantially smaller (Lehr, 2008). As previously mentioned, there is reason to believe that small scale business deserves attention: the bigger companies can reach investors, but it is the small and medium enterprises (SMEs) that face difficulties accessing capital.

 

Microfranchising, SMEs, and the subsequent growth
According to an article of the OECD (2004), SMEs contribute majorly to employment rates, to profits from national consumption and to export. OECD (2004) also pointed out the importance of SMEs to compete, to maintain an efficient reaction to market indication and fluctuations in international trade. Meanwhile, it is important that foreign capital investment in SME are prevalent (OECD, 2004). Furthermore, there exists a positive relationship between the size of the SME and the business environment (Ayyagari, Beck and Demirgüç-Kunt, 2005). Considering OFoundation’s mission to reduce poverty, we find it important to implement micro-franchising. OFoundation regards the well-being of SMEs an important factor in economic growth, and for this reason, OFoundation wants to provide strategic and financial support to SMEs. The reason why we do not pursue other finance methods, such as social impact bonds, is that the most useful methods require a workable level of abstraction and technical technical insight, that many other methods exceed. But we certainly do encourage other fincancial innovations!

 

Corporate social responsibility
It is important that negative externalities with regards to other factors are minimized when the economy is improved in underdeveloped countries. Business must consider human rights, environmental sustainability and the political environment (United Nations, 2015). We subscribe to this vision, and take it as a base line for our operations.[/vc_column_text][/vc_column][/vc_row][vc_row row_type=”row” use_row_as_full_screen_section=”no” type=”full_width” angled_section=”no” text_align=”left” background_image_as_pattern=”without_pattern” css_animation=””][vc_column][vc_accordion active_tab=”false” collapsible=”yes” style=”accordion”][vc_accordion_tab title=”Recommended books” title_color=”#000000″ background_color=”rgba(255,255,255,0.01)”][vc_column_text]

Fairbourne, J. S. (2008). MicroFranchising: Creating Wealth at the Bottom of the Pyramid

 

Sireau, N. (2011). Microfranchising: How Social Entrepreneurs are Building a New Road to Development

 

Felder-Kuzu, N. (2009). Microfinance and Beyond: Introducing Microfranchising and Social Businesses

 

Wankel, C. (2008). Alleviating Poverty Through Business Strategy

 

George, S. (1991). Green Revolution. How the Other Half Dies: Real Reasons for World Hunger, Penguin Books Ltd: 113-132.[/vc_column_text][/vc_accordion_tab][vc_accordion_tab title=”Recommended articles” title_color=”#000000″ background_color=”rgba(0,0,0,0.01)”][vc_column_text]Aylward, A. (2000). Trends in Venture Capital Finance in Developing Countries. The World Bank.

 

Ayyagari, M., Beck, T., Demirgüç-Kunt, A. (2005). Small and Medium Enterprises Across the Globe. The World Bank

 

Black, M. (2002). The history of an idea. In The no-nonsense guide to international development (pp. 10-30). London: Verso.

 

Brack, D., & Branczik, T. (2004). Trade and environment in the WTO: After cancun. Roya Institute of International Afairs Briefing Paper, 9.

 

Brautigum, D., Expert Group on Development Issues (2000). Aid Dependency and Governance. Stockholm: Almqvist & Wiksell International

 

Daly, H. E. (2005). Economics in a full world. Scientific American, 293(3), 100-107

 

Dione, J. (2008). Sustainable Development Report on Africa: Managing Land-Based Resources for Sustainable Development. Economic Commission for Africa

 

Feigenberg, B., Field, E. M., Pande, R. (2011). Building Social Capital Through MicroFinance. NBER Working Paper No. 16018. Retrieved 10 March 2011.

 

Galtung, J. (1971). Structural theory of imperialism. Journal of Peace Research, 8(2), 81-11

 

Gonzales, A. (2010). Is Microfinance Growing Too Fast? Microfinance Information Exchange.

 

Gordon, R. E., & Sylvester, J. H. (2004). Part II. Constructing Development in Practice (pp. 22- 48). In Deconstructing Development. Wisconsin International Law Journal, 22(1), 1-98

 

Grameen Bank. (2012). What is microcredit?

 

Guardian. (2014). www.theguardian.com/global-development/povertymatters/2014/feb/25/social-enterprise-succeed-traditional- development-failed

 

Lehr, D. (2008). Micro-franchising at the Base of the Pyramid. Acumen Fund.

 

Lélé, S. (1991). Sustainable development, a critical review. World Development, 19(6), 607-621

 

Monbiot, G. (2003). Something snaps: An international clearing union. In The age of consent: A manifesto for a new world order (pp. 139-180). London: Flamingo cool manifesto

 

Moss, T., Pettersson, G., Van de Walle, N. (2006). An Aid-Institutions Paradox? A Review Essay on Aid Dependency and State Building in Sub-Saharan Africa. Working paper 74: Center for Global Development

 

OECD. (2004). Promoting Entrepreneurship and Innovative SMEs in a Global Economy. Organisation for Economic Co-operation and Development.

 

Patricof, A. J., Sunderland, J. E. (2005). Venture Capital for Development. Brookings Blum Roundtable.

 

Rahman, M. A. (1990). The case of the third world: People’s self-development. Community Development Journal, 25(4), 307-31

 

Reddy, A. K. N. (1975). Alternative technology: A viewpoint from India. Social Studies of Science, 5(3), pp. 331-342 How northern technology is imposed on the south.

 

Santos F. (2012) A Positive Theory of Social Entrepreneurship, Journal of Business Ethics: Volume 111, Issue 3, Pages 335-351.

 

Scheela, W., Chua, R. (2002). Venture Capital in a Developing Country: The Case of the Philippines. Asia Institute of Management and Bemidji State University.

 

UNDESA. (2015). Global Sustainable development report. 2015 edition, advance unedited version.

 

United Nations Development Programme . (2015). Science, technology and innovation for sustainable development in the global partnership for development beyond 2015, Thematic Think Piece.

 

Venot, J-P., & Clement, F. (2013). Justice in development? An analysis of water interventions in the rural south. Natural Resources Forum, 37(2013), 19-30

 

Weis, T. (2005). A precarious balance: Neoliberalism, crisis management, and the social implosion in Jamaica. Capital & Class, 29(1), 115-147

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