s economy of eastern croatia - vision and growth · 2019-05-30 · 8th international scientific...

FACULTY OF ECONOMICS

IN OSIJEK

CROATIAN ACADEMY OF

ARTS AND SCIENCESThe Institute for

scientific and art research work in Osijek

UNIVERSITY IN MARIBOR

Faculty ofEconomics

and Business

UNIVERSITY INTUZLA

Faculty ofEconomics in Tuzla

UNIVERSITY OF J. J. STROSSMAYER

IN OSIJEK

International Scientific Symposium

ECONOMY OF EASTERN CROATIA - VISION AND GROWTH

8th

9 7 7 1 8 4 8 9 5 5 0 0 5

ISSN

1848 - 9559

8th INTERNATIONAL SCIENTIFIC SYMPOSIUM

ECONOMY OF EASTERN CROATIA – VISION AND GROWTH

Under the auspices of:

MINISTRY OF ECONOMY OF REPUBLIC OF CROATIA

Osijek, 30th – 31st May 2019

SVEUČILIŠTE J. J. STROSSMAYERA

U OSIJEKU

UNIVERSITY OF J. J. STROSSMAYER

IN OSIJEK

EKONOMSKI FAKULTET U OSIJEKU

FACULTY OF

ECONOMICS IN OSIJEK

HRVATSKA AKADEMIJA ZNANOSTI I

UMJETNOSTI Zavod za

znanstveni i umjetnički rad u

Osijeku

CROATIAN ACADEMY OF

ARTS AND SCIENCES

The Institute for scientific and art research work in

Osijek

UNIVERZA V

MARIBORU Ekonomsko-

poslovna fakulteta

UNIVERSITY IN MARIBOR

Faculty of Economics

and Business

UNIVERZITET U

TUZLI Ekonomski

fakultet u Tuzli

UNIVERSITY IN

TUZLA Faculty of

Economics in Tuzla

Print Studio HS internet d.o.o., Osijek

Proccedings indexed in:

Web of Science®

Web of Science®

PublishersJosip Juraj Strossmayer University of Osijek, Faculty of Economics in Osijek, Croatia

For the publishersMirna Leko Šimić, Ph.D. Faculty of Economics in Osijek, CroatiaBoris Crnković, Ph.D., Faculty of Economics in Osijek, Croatia

Programme committeeBoris Crnković, Ph.D., Chairperson,Josip Juraj Strossmayer University of Osijek, Faculty of Economics in Osijek, CroatiaMarko Backović, Ph.D., SerbiaSamo Bobek, Ph.D., SloveniaSaša Bošnjak,Ph.D., SerbiaThomas Cleff, Ph.D. GermanyIda Erscay, Ph.D., HungaryUlla Hytti, Ph.D, FinlandSafet Kozarević, Ph.D., Bosnia and HerzegovinaDražen Kušen, Ph.D., CroatiaDragan Milanović, Ph.D., CroatiaChris Pentz, Ph.D., South AfricaAcademician Vlasta Piližota, Ph.D., CroatiaMiroslav Rebernik, Ph.D., SloveniaBodo Runzheimer, Ph.D., GermanyJoaquina Sarrion Esteve, Ph.D., SpainOleg Sidorkin, Ph.D., GermanySlavica Singer, Ph.D., Professor emeritus, CroatiaErmina Smajlović, Ph.D., Bosnia and HerzegovinaKarin Širec, Ph.D., SloveniaŽeljko Turkalj, Ph.D., CroatiaBahrija Umihanić, Ph.D., Bosnia and Herzegovina

Organizing CommitteeMirna Leko Šimić, Ph.D., Chairperson, Josip Juraj Strossmayer University of Osijek, Faculty of Economics in Osijek, CroatiaKatica Križanović, univ. spec. oec., Coordinator, CroatiaSunčica Oberman Peterka, Ph.D., CroatiaMirela Alpeza, Ph.D., CroatiaDražen Ćućić, Ph.D., CroatiaAnamarija Delić, Ph.D., CroatiaNataša Drvenkar, Ph.D., CroatiaAleksandar Erceg, Ph.D., CroatiaIvana Fosić, Ph.D., CroatiaMartina Harc, Ph.D., CroatiaAdela Has, mag. oec., CroatiaTihana Koprivnjak, univ. spec. oec., CroatiaPetra Mezulić Juric, univ. spec. oec., CroatiaIvo Mijoč, Ph.D., CroatiaJulia Perić, Ph.D., CroatiaTunjica Petrašević, Ph.D., CroatiaLjerka Sedlan König, Ph.D., Croatia EditorsMirna Leko Šimić, Ph.D. Faculty of Economics in Osijek, CroatiaBoris Crnković, Ph.D., Faculty of Economics in Osijek, Croatia

PrintStudio HS internet d.o.o., Osijek

ISSN 1848-9559

Proccedings indexed in:

8th INTERNATIONAL SCIENTIFIC SYMPOSIUM

ECONOMY OF EASTERN CROATIA – VISION AND GROWTH

Vol. 1Foreword ...............................................................................................................................15Topics .....................................................................................................................................16

1. Global Economy and Sustainable Development ...........................................................17

Željko Bogdan, Krešimir IvandaTHE IMPACT OF PERSONAL REMITTANCES FROM ABROAD ON THE CROATIAN ECONOMY .............................................................................................19

Željko BogdanINTERNATIONAL TRADE AND EXCHANGE RATE REGIMES IN NEW EU COUNTRIES ...................................................................................................................30

Igor Cvečić, Marko Tomljanović, Melani MilotićIMPACTS AND PERSPECTIVES OF TRADE INTEGRATION BETWEEN THE EUROPEAN UNION AND THE USA .........................................................................51

Lena DusparaA MODEL FOR ANALYSING EXPORT STRATEGY IN METAL PROCESSING INDUSTRY IN CROATIA ...........................................................................64

Tomislav Galović, Florijan Ćelić, Igor ArapovićTHE COHESION POLICY INSTRUMENTS AS A FACTOR OF COMPETITIVENESS IN CROATIA ....................................................................................73

Sanja KneževićRETURNING EMIGRANTS AS A POTENTIAL FACTOR FOR THE DEVELOPMENT OF THE REPUBLIC OF CROATIA .......................................................86

Dražen KoškiINTERNATIONAL INTERTEMPORAL SOLVENCY: THE CASE OF THE REPUBLIC OF CROATIA ....................................................................................................95

Ivan Kristek, Mateja GlavotaTHE INFLUENCE OF MARKET CONCENTRATION ON THE PROFITABILITY OF INSURANCE COMPANIES IN THE REPUBLIC OF CROATIA ............................................................................................................................107

Senija Nuhanović, Mirnesa Baraković NurikićCOMMODITY EXPORT FROM BOSNIA AND HERZEGOVINA INTO THE EUROPEAN UNION AND COMPARATIVE ADVANTAGE ..................................119

Dalibor PudićTHE SIGNIFICANCE OF ENERGY POVERTY FOR THE FUTURE DEVELOPMENT OF CROATIAN ECONOMY ................................................................131

Nada RajićINTERCONNECTION OF THE STRUCTURE AND VOLUME OF MIGRATION FROM CROATIA WITH ECONOMIC DEVELOPMENT ........................141

Roman Šubić, Zoran Wittine, Ivona DragićDEMOGRAPHIC AND ECONOMIC EFFECTS OF EMIGRATION – RECENT EXPERIENCES FROM EASTERN CROATIA .................................................152

2. Macro Issues in Regional Development .......................................................................163

Ivona Blažević, Marina Stanić Šulentić, Andreja Katolik KovačevićTHE ANALYSIS OF THE BROD-POSAVINA COUNTY FOREIGN TRADE EXCHANGE FOR THE PERIOD FROM THE YEAR 2013 TO THE YEAR 2017 .................................................................................................................164

Tomislav Dagen, Antonija Matić, Vesna GalićSLAVONIA, BARANYA AND SYRMIA PROJECT” WITH THE PURPOSE OF ACHIEVING THE STRATEGIC OBJECTIVES OF THE NATIONAL SECURITY STRATEGY OF THE REPUBLIC OF CROATIA – LEGAL ASPECTS .......172

Domagoj Hruška, Tihomir LukovićBACK TO THE FUTURE: STRUCTURAL PROBLEMS OF ECONOMIC DEVELOPMENT OF SLAVONIA IN 1919 AND 2019 .....................................................187

Jelena Legčević, Ana-Marija HampovčanSTATE INTERVENTION IN SOCIAL MARKET ECONOMY ........................................207

Katarina Ott, Velibor Mačkić, Simona PrijakovićBUDGET OUTCOMES AND POLITICAL ACCOUNTABILITY: THE CASE OF EASTERN CROATIA REGION ........................................................................219

Danijela Slipčević, Suzana Dikonić, Ivan LakošANALYSIS OF THE REGIONAL COMPETITIVENESS INDEX OF THE REPUBLIC OF CROATIA WITH EMPHASIS ON EASTERN SLAVONIA ...................234

Maša Trinajstić, Marinela Krstinić Nižić, Elena RudanANALYSIS OF EASTERN CROATIA REGIONAL GROWTH: SHIFTSHARE ANALYSIS .................................................................................................250

3. Sectoral, Urban and Gender Issues in Regional Development ..................................259

Ivana Bestvina Bukvić, Martina Basarac Sertić, Martina HarcECONOMIC IMPACT OF GOVERNMENT MEASURES: ANALYSIS OF THE CONSTRUCTION SECTOR ......................................................................................260

Darko Dumančić, Katica Križanović, Štefan ŠtefanekECONOMIC DIMENSION OF SPORTS IN THE DEVELOPMENT OF A REGION: EXAMPLE OF THE DOBRO GYMNASTICS WORLD CUP OSIJEK ..........278

Jerko GlavašTHE INFLUENCE OF URBAN COMPONENTS ON CITY GROWTH ..........................295Mateja Petračić, Filip Bartoluci, Iva Sundji

THE ROLE OF ENTREPRENEURIAL ZONES IN ECONOMIC DEVELOPMENT OF EASTERN CROATIA .....................................................................308

Katarina Potnik Galić, Katarina Štavlić, Matej GrgačevićENCOURAGING INVESTMENT IN INDUSTRIAL HEMP FARMINGAS A FACTOR OF ECONOMIC DEVELOPMENT OF EASTERN CROATIA ....................322

Vedrana Vukadinović, Marko Tadić, Radmila TatarinTHE IMPORTANCE OD SECTION 08- OTHER MINING AND EXTRACTION IN SLAVONIA AND ITS STATUS IN 2017 ............................................336

Berislav Žmuk, Hrvoje JošićURBAN (IR)REGULARITIES IN EASTERN CROATIA: ARE THE MAIN URBAN ECONOMICS LAW FOLLOWED OR NOT? .....................................................351

4. Financial Infrastructure and Economic Development ...............................................365

Almir Alihodžić, Anna Zielińska-ChmielewskaDOES BANKS CONCENTRATION MATTER FOR LOANS PLACEMENT: EVIDENCE OF THE CONSTRUCTION SECTOR IN THE REPUBLIC OF SRPSKA? .............................................................................................................................366

Anto Bajo, Marko Primorac, Sanja ČavićMEDICINAL PRODUCTS MARKET AND FINANCIAL POSITION OF PHARMACEUTICAL COMPANIES IN THE REPUBLIC OF CROATIA .......................380

Ivana Bulog, Andrijana Rogošić, Sandra PeraACCOUNTING INFORMATION IN DECISION MAKING: EVIDENCE FROM MICRO COMPANIES ............................................................................................393

Aleksandar Erceg, Jasenka Crnković, Predrag DotlićFINANCING FRANCHISING GROWTH: ROLE OF BANKS IN CROATIA.................404

Ivica Filipović, Marijana Bartulović, Toni ŠušakKEY AUDIT MATTERS: NEW INFORMATIONAL VALUE OF AUDITOR’S REPORT...............................................................................................................................416

Saša Gravorac, Goran Šijan, Dejan GligovićSTATE AUDIT AND PUBLIC SECTOR EFFICIENCY, TWO ASPECTS OF THE SAME GOAL - COMPARATIVE SUMMARY - SERBIA, BH AND CROATIA ............................................................................................................................429

404 8th INTERNATIONAL SCIENTIFIC SYMPOSIUMECONOMY OF EASTERN CROATIA – VISION AND GROWTH

Aleksandar Erceg, PhD Josip Juraj Strossmayer University of Osijek, Faculty of Economics in Osijek E-mail address: [email protected] Jasenka Crnković, BSc Josip Juraj Strossmayer University of Osijek, Faculty of Economics in Osijek E-mail address: [email protected] Predrag Dotlić, MSc University Hospital Osijek E-mail: [email protected]

FINANCING FRANCHISING GROWTH: ROLE OF BANKS IN CROATIA

ABSTRACT

Gaining financial resources is a significant step for establishing or growing business since entrepreneurs’ funds are rarely enough. The most common way of gaining financial funds is through bank loans (from banks). Therefore, banks can play a significant role in creating franchising systems from franchisors side or starting a new venture from franchisee’s side. Some foreign banks in EU have recognized the potential franchising has for the national economy and created different financial products devoted to the development and support of franchising. Unfortunately, this is not the case in Croatia. Thus, this paper will examine the situation in Croatian banks and their attitude toward franchising. Paper will present franchising, current financial products for franchisors and franchisees and we will look upon a case study of the franchisor in Eastern Croatia (looking for) in search for financial resources for growth in commercial bank. Finally, we will present our findings and propose further research on this important topic. Keywords: franchising, financing, growth, banks 1. Introduction Franchising in its current form is present from the mid-1960s when Ray Kroc started with McDonald’s expansion and the introduction of “salesman suit” (Erceg, 2012). Franchising could be considered as a contractual model of business growth from the franchisor side or starting a new venture from the franchisee side. It is a business model in which franchisor grants to other company the right to do business in a prescribed manner over a certain period in a specified place in return for royalties or the payment of other fees (Elango and Fried, 1997). Franchising has (more than) several advantages and disadvantages for both included parties – franchisor and franchisee. Some of the advantages for franchisors include the lower capital

4054. Financial Infrastructure and Economic Development

requirement, faster growth rate, franchisees provide resources (time, managers and money) and for franchisees, they include lower failure risk and recognized and proved business system (Maitland, 2000; Shane, 2005; Webber, 2013; Erceg, 2017). On the other hand, disadvantages for franchisors include lower profit since it must be shared with franchisees, and potential control issues, while for franchisees disadvantages include excessive franchisors’ control and overdependence on the system (Spinelly, Rosenberg and Birley, 2004; Webber, 2013; Erceg, 2017). As it is already stated financing the growth system with franchisees resources is one of the major advantages of franchising from the franchisor side. In the first part of the paper, we will give a review of available literature on financing franchising growth, especially using different financial products. The second part of the paper will present current banking practice in the European Union which will be followed by a presentation of current practice in Croatia. In the fourth part of the paper, we will present a case study of the potential franchisor in Eastern Croatia and his path in finding financing for the growth of his franchising system. In conclusion, we will present our findings and propose further research on this topic. 2. Literature review In previous studies, researchers (e.g. Combs and Castrogiovanni 1994; Combs and Ketchen, 1999; Alon, 2001) have been using two popular approaches to explain the use of franchising – agency theory and resource-scarcity theory. Agency theory explains the use of franchising business model in the later years of company’s life circle while resource scarcity theory explains that use of franchising business model increases in early years (Castrogiovanni, Combs, & Justis, 2006). For the purpose of this paper, resource scarcity theory is of greater interest since it suggests that companies start using the franchising business model due to the lack of expansion resources. It is needed to emphasize that these resources are not only financial (capital scarcity) but also organizational (for expansion), managerial (knowledge-based), etc. (Elango and Jawahar, 2002; Alon, 2006). For the small companies, it is hard to raise capital through traditional financial markets and this creates obstacles in finding and developing necessary managerial talents (Shane, 1996). For a such company’s fast expansion can be the simplest way of building economies of scale in the area of purchasing needed for effective competing with the already established companies. (Combs & Castrogiovanni, 1994; Polo-Redondo, Bordonaba-Juste & Palacios, 2011). Franchising has been topic of many studies and most of them are focused on franchisor perspective of franchising (Combs, Ketchen, Shook, & Short, 2011) and thus Welsh (2002) has stated that there is a need for more studies focusing on franchisee perspective. There are only several studies looking at the reason why individuals become franchisees over independent companies (Peterson and Dant, 1990) or over corporate employment (Kaufmann, 1999). Some studies are focused on franchisee as an entrepreneur (Hoy, Stanworth, & Purdy, 2000; Frazer & Winzar, 2005). Young and McIntyre (2011) compiled a list of studies about franchising (Table 1) and found that most of the studies have been written from the franchisor perspective. These studies have been focusing on the role of the franchisees in terms of the franchisor’s operational goals achievement thus making control and power tantamount.


Table 1: Order of topics presented at International Society of Franchising conferences 1986-2010

1986-1999 2000-2010 Topic of paper Number of papers Topic of paper Number of papers

Franchise Management 69 Franchise Management 106 International Franchising 67 Performance & Growth 92 Relational Issues 57 International Franchising 53 Performance & Growth 50 Legal & Political 52 Legal & Political Issues 43 Relational Issues 47 Marketing 36 Marketing 33 Nature & Scope Franchising 35 Entrepreneurship 18 Economics 12 Modelling & Methodology 15 Entrepreneurship 12 Knowledge Transfer 13 Modelling & Methodology 9 E-Commerce/Internet 9

Source: adapted from Young and McIntyre, 2011: 15 As can be seen from Table 1, there is no research paper about the financing of franchising among the top 10 paper categories. Research conducted by Young and McIntyre (2011) showed only three papers with the topic of financing and franchising for 25 years of the conference in the organization of the International Society of Franchising. There are only several papers about financing and franchising which were found, and they include the question of financing (Štensova, 2004), the role of banks in Europe (Stern and Stanworth, 1994), and the effect of financial decision making (Falbe, Kumar and Welsh, 2011). 3. Banks and franchising in Europe Stern and Stanworth (1994) in their research stated that the biggest boost for franchising prospect in Great Britain was result of the banks support. The banks in Great Britain recognized the franchising business model as an entrance into small and medium entrepreneurship rather than looking it as big companies’ activity. Results of their research showed that only UK and Dutch banks were giving support to the franchising. French banks also indicated a good level of knowledge about the franchising business model. The banks from the other countries included in research (Denmark, Ireland, Finland, Italy, Norway, and Sweden) exercised unsupportive experience due to the poor knowledge of franchising business model. The findings suggested that theres is a knowledge gap and lack of interest in most European countries which needs to be addressed so franchising can reach its potential in Europe. In 1988 five major European banks from France (Societe Generale), UK (NatWest), Holland (ABN Amro), Italy (Credito Italiano) and Spain (Banco Sabadale) created an association of assistance network for franchisors wanting to expand in Europe (Štensova, 2004). The main goal of this association was a contribution to the franchising development in Europe and to help franchisors in saving money and time while they are establishing their presence in the market. This association was useful also for connecting different cultures as one of the preconditions for adaptation to foreign franchising system. From the first research about the role of the banks in franchising in 1994 until today there have been some changes. Today, many well-known European banks have special departments and employees devoting special attention to the franchising business model. The banks observe the growing use of franchising and provide support with different tools for further development of the franchising. They are also members of the national franchising associations and support


financially scientific conferences, workshops, and seminars about franchising and issuing different publications about franchising (e.g. Erste Bank AG, Austria). The banks even use franchising as one of their business models (e.g. Unicredit in the Czech Republic). (Table 2)

Table 2: Banks in Europe and attitude toward franchising Country Bank

Great Britain

National Westminster

Specific programs for franchise project financing Within section for SME’s Independent department Sponsors British franchising survey

Barclays Bank Franchising team with assigned territories

Lloyds’ bank

Department with franchising specialist Help with establishing a franchising system or buying a franchise Banking services and flexible financing

HSBC Inherited franchise department from Midland Bank Supports bank branch’s network, it's customers and franchising in number of ways

Royal Bank of Scotland Franchising and licensing department Franchise Relationship Managers provide expert support and guidance to the franchisees and franchisors across the UK

France

Crédit Lyonnais Center of expertise dedicated to franchising Initiatives: active participation in the Franchise Expo Paris fair ; jury member of the contest Les revelations de la Franchise ; Seeds of networks partner, a club of leaders of young networks of the franchise and organized trade.

Société Générale Special services dedicated to becoming franchisor or franchisee Expertise platform for credit file for the development of a franchise business

BNP Paribas Fortis Specialized financial assistance programs Uses own franchised agency locations

Germany Deutsche Ausgleichs Bank

Specialized in supporting business start-ups and franchises The bank has prepared various financial assistance programs for starting up a business, with attractive interest rates and repayment periods, with the aim of supplementing the insufficient own funds of the businessperson

Spain Banco de Sabadell Experience in simplifying the development of business initiatives in the world of franchises The special financial program offers the best conditions for financing working capital or acquiring or renewing assets

Holland ABN AMRO Special program offering Customization for formula The convenience of a fixed point of contact for all financing requests from potential franchisees Quick handling through our knowledge of your industry and the formula Collective benefit for potential franchisees

Italy Unicredit Special financial programs for franchisors and franchisees Uses franchising for agency locations

Intesa SanPaolo Special financial products for franchisees Austria Erste Bank der

Österreichischen Sparkassen AG

Regularly issues brochures entitled “Franchising Partnerschaft statt Alleingang” and “Start and Go – Leitfaden für Unternehmensgründer Special attitude toward the franchising

Slovakia Slovenská sporiteľňa Owned by Erste bank Has similar financial programs as Erste bank


Country Bank Czech Republic Komerční bank KB Franchising Program:

The financing of business activities in the framework of a franchising system. Access to a franchising network and to the franchisee as a part of a verified and successfully working system. Enables the franchisor to expand its franchising network without the need for further investment. Enables the franchisee to start up and develop a business in the franchising framework.

Source: authors based on the data from different banks As it can be seen from Table 2, a part of the most important European banks which are present on more than one market exercise some kind of special financing programs for franchising. These programs are intended for financing the purchase of franchise (for franchisees) or starting the franchise system (for franchisor). Besides these programs, some of the abovementioned banks are using franchising to expand their financial agencies network. Štencova (2004) state that the bank's experience showed that loans to the franchise companies (franchisors or franchisees) are a relatively safer mode of banking operations when compared to the small business start-up loans. The main reason for this is that the bank has to be familiar with the franchisor and its franchising concept rather than details of the franchisee applying for the loan. When examining the application for a loan they study the franchisor, system know-how, it's brand and strength, the franchising contract and manual, the number of current franchisees and if the franchisor is a member of national franchising association. Štencova (2004) has concluded that the banks through the franchisor examining determine if the franchisee is a predictable and suitable partner. 4. How to finance franchising growth in Croatia 4.1. Franchising in Croatia Franchising in Croatia is present from 1960-ties when Diners Club International started Diners Club Adriatic. Soon they were followed with American Express and some other international franchise networks (i.e. hotel chain Intercontinental, Varteks, McDonald's, etc.) (Erceg, 2018). At the beginning of 21st-century franchising in Croatia grew to the 180 franchise systems out of which 25 are only of Croatia origin. Based on data from Croatian Franchising Association (Kukec, 2016) there are 1.000 franchising locations and approximately 17.000 people are employed directly in franchising. Franchising is present in several industrial sectors. (Figure 1.)


Figure 1: Franchising across sectors in Croatia

Source: Author’s own work based on various sources

The majority of franchising companies are present in the fashion sector followed by fast food and restaurants. Currently, the biggest domestic franchising networks are Aqua with 55 locations, Surf'n'Fries with 56 locations, Centar energije with 15 locations, Putovanja za dvoje with 5 franchisees, Galeb with 7 locations, etc. From 25 domestic franchising systems, a few have expanded outside Croatia. The most successful is Surf’n’Fries (locations in more than 10 countries) followed by Aqua. Mlinar, Body Creator, Čuvar sjećanja, and Direct Booker (Erceg, 2018). Although the number of domestic and total franchising systems in Croatia is not high, Croatia is still the leader in the region of South East Europe regarding the number of franchising systems. This confirms the statement that franchising is accepted in Croatia. Franchising as the research topic is also accepted in the academic circles and there have been several studies in recent years about franchising in Croatia. (Table 3)

Table 3: Research about franchising in Croatia

Authors Topic Mahaček and Lihtar, 2013 business start-up through franchising Alpeza, Perić and Šoltić, 2012 Ziolkowska and Erceg, 2016

The role of innovation and creativity in implementing the franchising business model

Buljubašić and Borić, 2014 importance of promotion for the successful growth of franchise systems

Barković and Erceg, 2008 the connection between SME’s and franchising

Erceg and Kukec, 2017 Micro-franchising Perić and Erceg, 2017 Social franchising

Source: Author’s own work based on various sources As it can be seen from the above table, the connection between financing and franchising has not been a topic of research until now in Croatia.


4.2. Banks and franchising in Croatia The role of the banks for franchising growth in Croatia was part of two studies conducted by Alon, Alpeza and Erceg (2007) and Alpeza, Erceg and Oberman Peterka (2014). The results of the research from 2014 confirmed a significant level of same perceptions and attitudes of banking industry representatives about the presence and impact of main operational challenges affecting the franchising development of franchising in Croatia. (Table 4)

Table 4: Comparison of major opportunities and threats for franchising development in Croatia identified in 2006 and 2014

2006 2014 Opportunities • customers increasingly focus on

quality service and quality control; • the market still not saturated by

this business concept;

• undeveloped franchising market; • brand preference among domestic market;

Threats

• slow legal system; • low TEA index; • mentality

• slow legal system; • low purchasing power; • small and undeveloped market; • administrative barriers for doing business; • high taxes

Source: adapted from Alon, Alpeza and Erceg, 2007 and Alpeza, Erceg and Oberman Peterka, 2014 Presented opportunities and threats for franchising model development in Croatia from the banking industry viewpoint are showing that there is no change in almost ten years between two studies. When the results of these two studies were compared it was concluded that the economic factors influencing the use of franchising business model had not improved between two studies. (Table 5)

Table 5: Economic factors influencing franchise development in Croatia Research results

2006 Research results

2014

Economic factors

o Croatia is not recognized as a tax-friendly market;

o small market; o lack of public institution support; o the unwillingness of banks for

participating in franchise purchase financing;

o low purchasing power with relatively high franchise product/service prices;

o insufficient economic development; o high unemployment rate; o lack of adequate financial tools

o too expensive labor force; o decrease in purchasing power because of

crisis, poverty; o long time needed for the return of investment; o lack of structural reforms of the economy and

its influence in the decrease of GDP; o too small market; o the low capital potential of investors; o banks not willing to finance start-ups; o the unwillingness of banks for participating

in franchise purchase financing; o lack of non-traditional financial products in

the market; Source: adapted from Alpeza, Erceg and Oberman Peterka, 2014

As one of the main economic disadvantages factor for development of the franchising business model was pointed that the banks were not willing to finance start-ups and to participate in the financing of franchise purchasing. After five years from this study, the banking sector market in Croatia has not changed. There have been mergers and acquisitions but still, there are no financial products specialized for financing the franchising business model no matter it refers to the franchisor or franchisee. Today in Croatia we have “daughter” companies of major European banks like Unicredit, Intesa Sanpaolo, Erste bank, etc. In their home countries, all


previously mentioned banks are offering support to the franchising sector (franchisors and franchisees). In Italy, Intesa Sanpaolo has signed an agreement with an Italian company and franchisor of several fashion brands, Basic Italia, that they will offer series of financial benefits for entrepreneurs who want to open franchise store of Basic Italia brands like Robe di Kappa, K-Way and Superga (Vennini, 2010). This is the same with the Societe Generale bank in France which always has a booth on Franchising fair in Paris. But their “daughter” companies Zagrebačka banka d.d., Privredna banka Zagreb d.d., Erste bank d.d. and previously Splitska banka d.d. are not offering special financial product intended for franchising business model 4.2. Franchisor's road to finding the money For the purpose of this paper, we have researched (the way) if and how the banks treat and support the financing of franchise business in Croatia. We have compared this with Austria since we will look “mother” bank in Austria and if there is a difference considering the range of financial products designed especially for a franchise business. To present the current situation with the potential of banks financing franchise growth in Croatia we made an interview with Mr. Alan Orlić. He is a Helen Doron Early English franchisee in Osijek and Slavonski Brod and he is a founder and franchisor for the Tinker Labs franchising system. Helen Doron Early English is an internationally recognized English language learning system that has been in existence for 28 years and has been successfully implemented in more than 30 countries around the world. It has been successfully operating in Croatia since 2009, at 18 locations, with more than 1,500 participants. The method is based on creating a positive and entertaining environment in which children simply, quickly and easily adopts English according to the same principles as they have adopted their native language Mr. Orlić is a small entrepreneur client of one of the biggest banks in Croatia, which is a member of the large European bank group having a connection with franchising in their “mother” country. He contacted the bank to get financial resources needed for further growth and expansion of the Tinker Labs franchise. Currently, he manages a location in Osijek as a franchisor and he is planning to open another location in Vinkovci. Due to the lack of financial resources, he contacted the bank for the financial support for growth and expansion. Currently, the franchisor has a yearly income of circa 1 million HRK and bank rating A (good). Mr. Orlić approached the bank with an inquiry for a bank loan which should help him with the expansion of his franchise network. His SWOT analyses showed that Tinker Labs is presently only business of this kind in the east part of Croatia and thus making the opportunity to expand into other cities in Slavonia very high. Bank made financial analyses of the company’s annual financial reports taking not into consideration the whole franchise business and potential benefits and insurance that franchising may bring. Based on their analyses bank approved only overdraft in the amount of one company’s average monthly income what is the maximum amount for any other entrepreneur no matter if they are franchisor or franchisee. This bank is a well-known supporter of the franchising business model in their “mother” country and is sponsoring publishing of brochure about franchising. They are also using franchising for their growth by building a strong retail franchise with the Austrian savings banks (Company histories, 2005). This confirmed the point that banks don’t have special financial products for franchising because when approving bank loan for the franchise business (franchisor or franchisee) in Croatia, the banks don’t consider the whole franchise system but only entrepreneur itself and his/her business, financial reports, and collaterals. The bank in this case is not offering any special financial products for franchising and according to Mr. Orlić


are not considering starting to offer such products soon. If we look upon whole Croatian bankers’ market, there is no bank offering a special range of financial products for financing franchise business. There are rare possibilities for these companies to apply for subsidized credit lines offered by City, County or State government or agencies or through Croatian Bank for Reconstruction and Development. It is important to stress that these credit lines are opened to all entrepreneurs, but not only to franchise business. Trying to find a connection between “mother” bank in Austria and franchising, we have found that it supports franchising through publishing brochure about franchising and using franchising for the expansion of its sales network. But when we investigated the experience for the provision of special products for financing the growth of franchise business for franchisor or starting a new venture for franchisee, the result referring to the “mother” company was the same as in Croatia. Even other banks in Austria are not offering special products for the franchising business and the company’s credit rating is defined only through entrepreneur itself and not taking into consideration franchise business in general. The companies trying to expand their business through franchising or to start a business as franchisee, can apply for subsidized credit lines as all other companies. This only confirms that, the banks in Austria also don’t recognize franchising as a potentially less risky way of doing business. 5. Conclusion The national governments always state and declare that the SMEs and self-employment are of great importance for solving the employment issue on the national level. Accordingly, the companies to increase the employment need support no matter if they want to grow by exercising the franchise business model or entrepreneur wants to start a new venture as a franchisee. The banks could have great significance and influence on the development of franchise networks (in the country),helping businesses while they try to expand and grow their business. Currently banks don’t see franchising as something different in relation to the start-up and the question arises do the banks understand the franchising business model and if the good practice examples exist? As it was stated in the paper, there are good practice examples in Europe where the using of franchising and franchising networks contribute significantly to the national economy. How to proceed forward in Croatia? Simply, by copying the good UK’s or France’s practice examples. The first step of understanding franchising business model should be the creation and education of the franchising specialist teams at the bank’s headquarters and then in banks branches depending on the bank’s size. The second step should be designing the special financial products for the applicants wanting to enter franchising business. The third step should be establishing a better connection with the national franchising association as it is the case in countries where the banks are offering special financial products. For the further understanding of the relation between franchising and banks we propose further research:

• A study in countries where there are special financial products in order to evaluate the influence of these products on the growth of franchising

• A study to propose an education program and policy recommendations which could lead to the introduction of special financial products in Croatia.


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