A franchisor's decision to expand internationally into foreign markets is a decision requiring a lot of research, deliberation, time and money. The list of factors a franchisor should consider before expanding internationally is extensive, and includes the following factors: economic conditions; political systems and legal structure; language; culture; dietary customs and preferences; climate, a determination as to whether the franchisor's trademarks are available and capable of protection in the jurisdiction; income levels and standard of living statistics; religious considerations; treaties or commercial relationships that either facilitate or hinder trade (such as trade treaties versus trade embargoes); foreign investment laws and sale of goods laws; and other subjective considerations. Despite this multitude of considerations, international franchising continues to grow exponentially, especially in emerging markets such as South America and Asia, which is no surprise given the fact that eighty percent of the world's population live in emerging markets and these markets present wide-ranging opportunities for franchisors looking to expand. The focus of this article will be on Central and South America, and its scope will be to provide a broad overview of some factors that would be relevant to a franchisor in determining whether to expand in this area. A Very (Very) Broad Legal and Legislative Overview – Treaties and Franchise Law Treaties In 2005, the United States signed the Central American Free Trade Agreement (CAFTA) with Mexico, Costa Rica (who has yet to formally approve the treaty), the Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua. This region (excluding Mexico from the calculation) is the second-largest market for U.S. exports, buying in excess of USD 15 billion in goods from the U.S., making it the tenth largest export market for the U.S. worldwide. Proponents of CAFTA cite its benefits as uniting to compete with Asia's dominance in the textile industry, enforcing the protection of labour and the environment in Central America, and generally promoting trade with the U.S. and the signatory countries. Canada is also negotiating a proposed free trade agreement with the Central American states of Guatemala, El Salvador, Honduras, and Nicaragua, called the Canada Central American Free Trade Agreement. The goal of this treaty, as with all trade treaties, is to boost trade flow between the countries. Canada already has a bilateral free trade agreement with Costa Rica: the Canada-Costa Rica Free Trade Agreement (CCRFTA), which received Royal Assent in December of 2001 and was tabled in the House of Commons on September 20, 2001. With respect to South America, the United States is currently working on pushing through the Andean Free Trade Agreement (AFTA) with Columbia, Ecuador, Peru and Bolivia (with Bolivia participating as an observer). This treaty is being met with resistance in South America, both by private citizens and agricultural community advocacy groups for its proposed removal of all tariff barriers on imported agricultural products. Canada has also begun negotiations with the Andean countries, consisting of Bolivia, Colombia, Ecuador, Peru and Venezuela for a free trade treaty, with the most recent round of exploratory talks held in Ottawa on May 13-14, 2003. All indications to date point to support of this proposed treaty. Of course no discussion on treaties involving Central and South American trade would be complete without touching on the long negotiated, much anticipated, and very much still-a-work-in-progress Free Trade Area of the Americas treaty (FTAA), which was first conceived in 1994 at the Summit of the Americas held in Miami, U.S.A., and comprises the 34 nations party to the Organization of American States. If eventually ratified by all member states, this treaty would hold the potential to create the world’s largest free trade area, with over 830 million people and a combined gross domestic product of more than $20.1 trillion. 'The Americas' is a destination for $3.68 billion CDN of Canadian goods, and Canadians directly invest $66.4 billion CDN in the region, which figure represents 15.4% of Canada's total outward investment. The intent of the FTAA is that it co-exist with pre-existing agreements, like NAFTA, whereby the pre-existing treaty would govern the relationship between the countries and the FTAA would substitute these relations only if the parties agreed. Franchise Law The only country in Central and South America with specific franchise legislation is Brazil. Brazil is the largest country in Latin America, comprised of an area of over 8 million square kilometres and a population of over 165 million people. In 2001 there were approximately 894 franchisors and 36,479 franchisees in business format franchises. Brazilian franchise law mandates that franchisees receive a disclosure document at least 10 days prior to the execution of a franchise agreement and prescribes the content required in the disclosure document (such as franchisor history, annual reports, pending litigation, and so on). Brazilian franchise law also prescribes certain mandatory clauses that must be contained in franchise agreements (such as trademark rights, territorial definition, termination conditions, and so on). Under Brazilian franchise law, a franchise would exist where an entity licenses the right to use a trademark or patent, along with the right to distribute products or services on an exclusive or semi-exclusive basis in exchange for compensation. It is important to note that foreign franchisors are required to have their franchise agreement recorded by the Brazilian Patent and Trademark Office in order to be enforceable and to allow remittance of payments abroad, such as royalties and other ongoing payments to the franchisor. Although no other country in Central and South America has specific franchise legislation, franchising continues to grow in almost all countries due to the fact that many Latin Americans spend time abroad in the U.S. and become accustomed to such products and lifestyle, and are used to doing business with U.S. firms. Franchise agreements in such countries would fall generally under commercial code and foreign investment type legislation, however some countries require registration of the franchise agreement, such as Venezuela, which requires registration of franchise payments, royalties, patents or technical assistance agreements with the Superintendent of Foreign Investments. Venezuela also has a set of guidelines that exempt qualifying franchise and master franchise arrangements from its Pro-Competition Law, which is an antitrust statute that generally prohibits conduct, practices, and agreements that impede, restrict, or limit free competition. Franchise, dealership, and master franchise agreements normally include restrictions that are forbidden by Venezuela's Pro-Competition Law, and therefore in recognition of the benefits afforded by the franchising sector, Venezuela issued Guidelines for Evaluating Franchise Agreements on January 7, 2000. Similar to Venezuela's requirement to register agreements, Peru also requires that license agreements be registered at the Patents and Trademarks Office of Peru (INDECOPI). A general concern among investors considering doing business in developing countries is that of corruption, and specific to the Central and South American region, narcotic trafficking concerns. In certain countries, such as Bolivia, incidences of corruption in the court system and among low-level officials is a matter of national concern, and a factor well worth bearing in mind for any franchisor considering expansion in this country. Columbia's problems center around its continued terrorist activity and narcotics industry, which damage foreign investors' confidence in the country. U.S. franchisors considering expansion into Columbia should note that the U.S. prohibits Americans from doing business with entities affiliated with known Columbian drug cartels. President Clinton signed an Executive Order, under the International Emergency Economic Powers Act, barring U.S. entities from any commercial or financial transactions with known Colombian "Kingpin" cartels and with individuals and companies associated with the traffic in narcotics. A Geo-Social Overview As indicated at the outset of this article, the purpose of this article is to provide a broad overview of the Central and South American social and legal landscape, highlighting factors relevant to a franchisor considering franchising in this area. The following table contains a selection of geo-social characteristics that are relevant to a franchisor considering expansion into Central and South America: Country Population Languages Spoken Government Legal System Argentina 39,921,833 Spanish (official), English, Italian, German, French Republic Mixture of US and West European legal systems Belize 287,730 English (official), Spanish, Creole Parliamentary Democracy English law (common law) Bolivia 8,989,046 Spanish (official), Quechua (official), Aymara (official) Republic Based on Spanish law and Napoleonic Code Brazil 188,078,227 Portuguese (official), Spanish, English, French Federative Republic Based on Roman Code Chile 16,134,219 Spanish Republic Based on Spanish law Columbia 43,593,035 Spanish Republic Civil law, based on Spanish law Costa Rica 4,075,261 Spanish (official), English Democratic Republic Civil law, based on Spanish law Ecuador 13,547,510 Spanish (official), Amerindian languages Republic Based on civil law system El Salvador 6,822,378 Spanish, Nahua Republic Based on civil and Roman law, some common law French Guiana 199,509 French N/A – governed by France French legal system Guatemala 12,293,545 Spanish (60%), Amerindian languages (40%) Constitutional Democratic Republic Civil law Guyana 767,245 English, Amerindian languages, Creole, Hindi, Urdu Republic within Commonwealth Based on English common law Honduras 7,326,496 Spanish, Amerindian languages Democratic Constitutional Republic Based on Roman and Spanish civil law with increasing influence on common law Nicaragua 5,570,129 Spanish (official) Republic Civil law Panama 3,191,319 Spanish (official), English (14%) Constitutional Democracy Civil law Paraguay 6,506,464 Spanish (official), Guarani (official) Constitutional Republic Based on Argentine codes, Roman law and French codes Peru 28,302,603 Spanish (official), Quechua (official) Constitutional Republic Based on civil law systems Suriname 439,117 Dutch (official), English, Sranang Tongo Constitutional Democracy Based on Dutch legal system Uruguay 3,431,932 Spanish, Portunol, Brazilero Constitutional Republic Based on Spanish civil code Venezuela 25,730,435 Spanish (official) Federal Republic Common law Conclusions and Suggestions There are a myriad of topics for a franchisor considering expansion to think about, such as the imposition of withholding taxes on payments received from franchisees in Central and South America, the registrability of trademarks in the area, the enforcement of franchise agreements in different jurisdictions, and so on. Such a detailed discussion is beyond the limits this article and in closing the author simply wishes to draw such matters to the reader's attention. As with most business decisions, the decision to expand into a foreign jurisdiction is one that will require sage legal and business advice from trusted professionals, as well as a detailed consideration of the variety of factors present in the proposed jurisdiction. An option that franchisors should always bear in mind when deciding whether to enter a foreign market is that of master franchising their system, which is the most common foreign expansion strategy used by franchisors. The obvious advantage to master franchising is that the franchisor is entering into a business relationship with a resident of the proposed new area. This resident will speak the local language, have access to local legal counsel and other professional advisors, and should have knowledge of the area's market, preferences, culture, customs, and so on, all of which are crucial to successful expansion into a foreign jurisdiction. Of course a master franchisee must be selected with great care, ensuring that the franchisor and master franchisee can work well together, understand each other's business and political cultures and share the same objectives. It is clear that franchising is on the rise in Central and South America, and with the increasing trade between these areas and Canada and the U.S., the increased exposure to Canadian and American franchise systems, and its geographic proximity to Canada and the U.S., it is definitely an area of the world worth looking closely at when determining whether to expand internationally.
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