On February 11, the Ministry of Trade issued a new regulation to limit the expansion of international restaurant chains, such as McDonalds, KFC and others. The regulation stipulates that the number of outlets owned and managed by either a franchisor or franchisee cannot exceed 250. However, if the company already operates 250 outlets, and would like to add more outlets above the 250 limits, the new outlets have to be franchised by way of a joint venture with a small or midsized enterprises (SMEs).

The goal of the new regulation on the size of franchise chains is to empower SMEs, promote domestic products and limit franchise control by one entity. This new regulation supplements regulation issued last February on the implementation of franchising. The new regulation only affects food and beverage outlets. The new regulation defines a joint venture arrangement under two categories of investment value. If the investment value is less than Rp 10 billion, the investment by the franchisee should be at least 40%; if it is over Rp 10 billion, the investment by the franchisee must be at least 30%.

The regulation emphasizes the importance of SMEs. The government’s intention is clear: it wants to further and support the interest of the SMEs, particularly those outside Jakarta. For that purpose one has to appreciate this positive intention as SMEs are the backbone of the Indonesian economy.

It is obvious that the limitation of 250 outlets would not significantly impact the international chains, as that number is not small. However, a chain can still control additional outlets established through a joint venture with equity control up to 70%. In other words, although the regulation is meant to help SMEs, it still gives control to international chains.

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*This column has been published by Forbes Indonesia magazine and can be accessed through http://forbesindonesia.com/berita-203-balancing-franchise-growth-with-aid-to-smes.html