The effects of institutional quality and market potential on the agglomeration of fast food franchises in Central America

Abstract

Purpose The purpose of this paper is to explore the interplay of institutional quality and market potential factors on the agglomeration of foreign fast-food franchises in major cities in Central America. Design/methodology/approach The authors approached the research question through a regression analysis of the main fast-food chains operating in the 41 largest cities in Central America. The exploratory analysis in this paper attempted to discover the statistical relationship between institutional quality and market potential factors on the agglomeration of fast-food chains in specific cities. The paper also examined the spatial distribution of fast-food units in selected cities to try to discover specific patterns on the selection of specific locations within each city. Findings The findings of this paper suggest that population size and institutional quality in terms of regulatory efficiency were the two most significant predictors of fast-food chains agglomerations in selected Central American cities. The authors also found a negative interaction between market potential and institutional quality on agglomeration of fast-food restaurants, whereby a relatively weak institutional environment might deter investors, even if initially a market offers moderate potential. Finally, they found specific geographic patterns for the chosen locations of fast-food places that signal to a preference for urban locations with easy access to main thoroughfares, high commercial traffic and more affluence. Research limitations/implications The small sample size was a major constraint. Moreover, population size as a measure of market potential was available for all cities, but other city-level indicators were only available for a small number of cities. The preliminary results aligned with the predictions in this paper, yet the generalizability of the findings of this paper is limited by the sampling and measurement issues noted above. Finally, the paper did not include all fast-food chains in the cities examined, and inclusion of more foreign and domestic chains should be considered in future studies. Practical implications Local governments should consider the factors that impact franchise chains’ decisions to enter a market and the specific locations in which they choose to locate their units. Improving the quality of local institutions could be instrumental in attracting investment. Originality/value Very few studies have focused on Central America as a recipient of investment by fast-food chains. The region is less than attractive in terms of both market potential and risk. Yet fast-food franchises have continued to grow over the past two decades, making the examination of their investment decisions worth studying. The inclusion of institutional quality at the city level is an additional contribution of this paper. This paper furthers our understanding of the factors that drive investment decisions of global franchisors in regions with low to medium market potential and medium to high levels of institutional risk.