From about 800 franchise brands before the start of the pandemic in 2019, Malaysia hit the 1,000 franchise brand mark at the end of 2021. According to the Malaysian Minister of Domestic Trade and Consumer Affairs, the country now has 1,090 franchise brands with more than 13,000 outlets across the country. This is a whopping 25% growth rate over a 2-year period – 12.5% annual average – at a time when the general economy’s best performance was 3.1%.
From my recent review of the franchise industry of other leading franchise systems in the world: USA, Australia, South Korea, Brazil, South Africa etc., it is clear that the franchise industry in many countries grew while the larger economy sank during the pandemic. What this tells us is that franchising is a business model for spurring entrepreneurship and growing the economy not just in peacetime, but also in “economic wartime” like the one the world recently experienced.
From my study of several leading franchise systems around the world over the last 7 years, it can firmly be concluded that building a high-performing and resilient franchise industry comes down to having the right institutional framework in place. That is how Malaysia has been able to grow its franchise industry.
Apparently, the reliability of, and the respect that the international business community has for the institutional framework for franchising in Malaysia is the single most critical reason the country is maximizing the benefits of the business model.
This article discusses the make-up of the institutional framework for franchising in Malaysia. The framework rests on a 6-legged stool. These legs are enabling laws, all-government commitment, support agencies, an active association of practitioners, formal educational institutions for capacity building, and enabling business environment.
The Enabling Laws
Malaysia has been able to grow its franchise industry to the level it is now, in part, because of an important piece of legislation called the Franchise Act 1998 (as amended). The Act contains clauses that protect the interests of both franchisors and franchisees as well as stimulate the growth of the industry. Among other issues covered, the Act defines what constitutes a franchise, stipulates the procedure for registering a franchise business, mandates disclosure of material business information by franchisors, and stipulates the requirement to offer franchise sales e.g. the number of years and outlets to have operated before franchising respectively, the cooling-off period before the contract formally commences, contract duration, exclusive territory, support arrangement, fees payments, non-competition clauses and so on.
The rationale for having such a law is simple. Although a franchise business is a relationship-based business and a great relationship between franchisors and franchisees is a must for the success of both parties, in practice, however, parties cannot rely on their relationship alone to get each other to come through on their ends of the bargain. The Malaysian Franchise Act 1998 has proven to be an effective contract law with a predictable enforcement framework that has propelled the growth of the country’s franchise industry.
Other countries where specific franchise law has fuelled the growth of their industries include the USA with its Federal Trade Commission’s Franchise Rules and Australia (considered the franchise capital of the world) with its Australian Franchising Code of Conduct.
All-Government Commitment
In Malaysia, there has been a consistently high level of commitment to franchise business development at the highest authority of government at all levels. Franchising was deliberately introduced as an enterprise promotion and economic development tool by the former Prime Minister of the country, Dr Mahathir Muhammad in late 1980. All successive Prime Ministers and government bureaucrats have embraced the business model and shown high interest in growing the industry.
The only few times I have personally met two of the country’s Prime Ministers – Mr Najib Razak and Mr Muhyiddin Yassin, were at franchise business events. Busy as their schedules are, the Prime Ministers and the Minister of Domestic Trade hardly miss important franchise industry events. Just a few days ago, the current Prime Minister, Mr Ismail Sabri, was in Hong Kong for the singular purpose of promoting the Malaysian franchise industry and brands. This is the level of leadership commitment that has seen the Malaysian franchise industry grow consistently.
Effective Support Agency
Franchising in general is a relatively new business model to the world and thus needs nurturing and conscious development. In Australia, the agency responsible for nurturing the franchise industry is called the Australian Competition and Consumer Commission (3C). Malaysia owes the rapid development of its franchise industry to the inspiring efforts of PNS.
Perbadanan National Berhad – PNS (now Pernas) is the Malaysian government’s agency that oversees the country’s franchise industry. The agency develops specific plans and initiates programs and projects to develop the industry. It also provides funding, training (through its Pernas Franchise Academy), a policy framework and some regulations for the growth of the industry. It sometimes acts as a master franchisee to top international brands coming into Malaysia. For example, Pernas is the master franchisee for the Australian Gloria Jeans Coffee among other brands in Malaysia.
Active Association of Franchise Business Practitioners
An active association of industry practitioners – primarily franchisors and franchisees, and franchise consultants – is another pillar upon which the institutional framework that has developed the Malaysian franchise industry rests. The Malaysian Franchise Association is a respected professional organization that drives the growth and development of the industry. This body plays four important roles in the development of the country’s franchise system.
- Standards: it regulates the activities of its members, ensuring high professional conduct and taking measures to discourage and/or punish bad behaviours among members.
- Promotion: it plans and engages in well-coordinated programs and activities to showcase the industry.
- Representation: it lobbies for policies for strengthening the industry. It also represents the country at international franchise forums like International Franchise Association (IFA), Global Franchise Associates (GFA) and European Franchise Federation (EFF).
- Education: through short courses, seminars and diplomas, MFA provides training and information to members to enable them to make the right decisions and manage their businesses in the best way possible. Its annual franchise conference draws participants from within and outside the country and it is a major platform for educating members on trends in the global franchise markets.
Formal Institutions for Capacity Building
Formal academic training, including courses and programs in higher institutions of learning, is a sustainable way to build capacity and assure the long-term viability of the franchise industry. In many Malaysian universities and other higher learning institutions, there are academic courses and programs, ranging from individual subjects, courses, degrees, masters and PhD, specifically on franchising. I am a product of this academic institution as I earned my PhD in Franchising from one of the country’s universities.
There are also many professors and researchers whose research interest is franchising and who are advancing knowledge and understanding of the business model in the country.
General Business Environment
Lastly, one of the factors that have propelled the Malaysian franchise industry forward is the country’s consistent improvement in ease of doing business. Think of developing a country’s franchise industry as trying to lose fat and build muscles in any part of your body, say belly. While specific exercises and diets targeting the concerned part of the body could help you to an extent, getting a sustainable result requires full body exercise and a diet that is healthy for the entire body.
No matter the number and quality of franchise industry-specific measures, including those discussed earlier, the industry would not have achieved any meaningful growth if the general business environment was not enabling.
Thus, to sustainably develop her franchise industry, Malaysia has made concerted efforts to progressively reduce the time, procedures and amount of money entrepreneurs expend to register their businesses, register properties, get construction permits, get electricity, get credits, pay taxes, have their contracts enforced and trade across borders.
Conclusion
Among other benefits, franchise businesses bring together local entrepreneurs, brands, employees and communities to create value, share the wealth and boost the productivity of the economy. The business model has enabled Malaysians to join proven business systems and have access to the opportunity to own wealth-generating assets. Franchising has created job opportunities for many while serving as the biggest vocational training in the economy.
By and large, Malaysia has been able to get its franchise industry to the current inspiring level due, largely, to consistent efforts by successive governments at building the right institutional framework for the industry. This article has x-rayed the make-up of the institutional framework the country has used to grow its franchise industry.
The goal of this article is not to highlight that the Malaysian franchise industry is the best in the world. It is simply to celebrate the inspiring feet this developing country has achieved in franchising and share best practices that other countries could learn from.
