Cultural and culture-related barriers to the expansion of international hotel companies in Italy. A focus on franchising entry mode.

1. Introduction 
 
Italy is the country with the largest hotel stock in Europe with more than one million 
rooms (Federalberghi, 2010); its heterogeneous hotel industry is dominated by 
independent, individually and small family owned hotel groups. Although this can be 
considered a general European phenomenon, it appears to be particularly accentuated in 
the Mediterranean peninsula. Italian hotel market is suffering a certain degree of 
maturity and saturation in terms of both offer and demand patterns but Italy can still be 
considered one of global leader countries with regard to the hotel industry. The 
operating presence of all the major international hotel companies witnesses its business 
attractiveness. It has been argued that the market saturation on the one hand and the 
increasing importance of marketing and technology on the other is putting some 
pressure on the independent hotels (Holverson and Revaz, 2006); branding appears to 
be one of the few solutions left to independent owners to keep performing well or even 
to survive. However, the estimated hotel brand penetration in 2009 was of only 7.4% in 
Italy, far away from a European level of brand diffusion (BNL Paribas Real Estate, 
2010). Only 5.6% of the total rooms in the market belong to the 35 main international 
companies, regardless of the affiliation strategies. Among the few hotel entrepreneurs 
nowadays affiliated to companies in Italy, probably less than 5% opted for franchising. 
Surprisingly, very few studies focused on hotel franchising diffusion in Italy, and those 
which have been carried out, took Italy into consideration only in the broader EMEA 
(Europe, Middle East and Africa) context (e.g. Altinay, 2005b; Altinay, 2006; Altinay 
and Wang, 2006; Altinay and Okumus, 2010). Generally, the authors justified the 
importance of these studies by mentioning the low brand penetration in the EMEA area 
(24%). Similarly, it can be argued that Italian scenario, with the largest hotel market and 
the lowest brand and international franchisor penetration, also needs a closer exploration  
and more exhaustive analysis. The internationalisation literature does not seem able to 
provide an answer to the Italian low brand penetration, due to the application in these 
studies of what could be defined an organisational-centric perspective: particularly the 
assumption that cultural distance affects the decision on entry mode, implies the 
possibility for the company to adapt to the market. Some argued that when cultural 
distance is high, companies should opt for non-equity entry modes (e.g. Erramilli and 
Rao; Quer et al., 2007); others affirmed the tendency to prefer resource commitment
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strategies to enter these culturally distant markets (e.g. Rodriguez, 2002). In other 
words, what the literature seems to suggest is that companies have a range of options at 
their disposal which in the end will guarantee their adaptation to the host country 
market. However, in Italy this does not seem to be happening. It has been pointed out 
that the reason why international franchising is not taking root in the country is the lack 
of a franchising culture (Finnie et al., 1999; Altinay, 2005b; Altinay, 2006; Altinay and 
Wang, 2006; Altinay and Okumus, 2010). A hypothesis which, in addition to appear 
based on anecdotal evidence rather than on empirical data, is possibly the expression of 
the organisational-centric orientation, as it relieves companies of any responsibility in 
their expansion failure and which is based upon how companies regard the market. 
Potential partners have rarely, if ever, been involved in these researches.  
The assumption underpinning this study, is that there are cultural and culture-related 
barriers to international expansion, but these will be examined from a twofold 
perspective: that of international hotel firms and that of potential partners. The belief is 
that since franchising agreements implies partnership, a good understanding of its 
implementation issues requires the involvement of both parties. 
 
The research aim is to understand if Italian culture and its related aspects act as barriers 
to international hotel companies franchise expansion in Italy. 
  
The research objectives can be expressed as follows: 
1. To provide a better understanding of the low degree of hotel franchising 
diffusion and investigate if this can be ascribed to cultural  and culture-
related aspects. 
2. To assess and estimate the degree of responsibility of the parties involved in 
the creation of cultural barriers and how these hinder franchising diffusion; 
3. Showing that the involvement of the potential partners in the research and 
the abandonment of an organizational-centric perspective can generate new 
important aspects to consider in the franchising internationalisation 
literature, thereby enriching it and stimulating new research. 
  
The lack of research seeking for ad hoc explanations and the inapplicability of the 
existing literature for the mentioned situation, along with the twofold perspective 
approach mentioned above that this research will take, are believed to bestow interest
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and relevance from both academic and practical perspectives on the proposed study. 
The former might be enriched by the demonstration of the necessity of the partners 
involvement in internationalization research conduction; the latter refers particularly to 
the individuation of cultural barriers to the expansion through franchising in the country 
and to a closer definition of potential franchisee’s perspectives towards franchising 
agreements in the hotel sector. A source of information which might be very important 
to top management and decision makers. 
 
After a market context and background section, the literature on internationalisation and 
franchising is reviewed. Particularly analysed are the cultural aspects involved in the 
franchising process, and propositions for this study are inferred from existing 
knowledge. A methodology section, followed by the exposition of the results and of 
their implications are provided. Finally, conclusions, limitations and further research 
suggestions are presented. 
 
 
 
2. Market context and background 
 
In order to provide an economic context for the current research, some long term 
statistics and data regarding franchising are presented. The following paragraphs attest 
the importance of the Italian hotel market and the general and hotel franchising 
diffusion in the country. Along with other reports and statistics, a strong reliance as data 
source is given to Federalberghi, and particularly to its most recent report 
(Federalberghi, 2010). Federalberghi is the national hotel association and among its 
different aims, there is that of providing periodical statistical information about the hotel 
industry. The annual report is the Italian most specific data source regarding the national 
hotel sector and it is believed to constitute a highly reliable aid for the following 
analysis. 
 
2.1 Supply and demand: some historical data 
 
According to the most recent Eurostat statistics referring to year 2009, Italy boasts the 
highest number of rooms in Europe, generating 237,7 millions of room nights (Eurostat,
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2011). Italy is the country with the fourth largest hotel rooms offer, following those 
registered in United States, Japan and China, which are however much larger in terms of 
territorial extension and population. In Europe and in the Mediterranean area the Italian 
hotel system can then be considered leader at least in quantitative terms, even though it 
is also believed to offer a higher quality in accommodation and services offered 
compared to other European countries (Federalberghi, 2010).   
However, Italy is a destination which strongly feels the effects of seasonality, 
consequently the hotel occupancy rate consistently shows lower values compared to 
other leader countries (Figure 2.1).   
 
Figure 2.1 Hotel Occupancy rates (%) in some leader countries (1995-2008) 
0
10
20
30
40
50
60
70
80
90
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
China
USA
UK
Greece
Spain
France
Italy
Japan
 
Source: Federalberghi on UNWTO Data (2010), p.11. 
 
The Italian hotel industry has a long and particular history. Since the 20’s the sector has 
steadily grown in terms of quantity and quality offered, despite periods of adjustment 
and re-organisation, mainly due to market and institutional changes. Particularly, 
between 1950 and 2008 hotels showed a yearly average growth rate of 0.89%. The 
number of properties and rooms increased from 20,247 to 34,155 and from about 
216,000 to 1,073 millions respectively. This steady growth was accompanied by a 
correlated rise of demand. These data are summarised in the following tables (Tables 
2.1 and 2.2) and testify a growth in the long period which guaranteed the leadership 
position currently held by the Italian hotel market. In the 1990 and 2000 decades a
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process of adjustment and rationalization took place, leading to a reduction in the 
number of properties but in an increase in the number of rooms supplied. 
 
Table 2.1 Hotel Properties and Rooms 
 
Source: Elaboration on Federalberghi (2010), p. 30  
 
Table 2.2 Hotel Arrivals and Nights (Millions). 
 
Source: Elaboration on Federalberghi (2010), p.30 
 
The average number of rooms per property increased constantly reaching an average 
hotel size of 31 rooms in 2008. However, this still appears low compared to the average 
of 59 rooms per property registered in the EU (Federalberghi, 2010). Nevertheless, this 
data is not surprising if considered in the light of the broader entrepreneurial culture 
present in the country. Indeed, in Italy 93% of the businesses are represented by family 
firms and 98% of them have less than 50 employees (Italian Association of Family 
Firms, 2004. Cited by Mussolino et al. 2005) falling into the Small and medium 
enterprises (SME) category. In terms of quality, in the 1990’s the hospitality system saw 
also a requalification movement which resulted in the decrease of one and two star 
properties and an increase in the mid and up-scale estates. The majority of hotels 
(51.9%) and rooms (52.5%) currently belong to the three star, mid-scale market (2008). 
The one and two star properties cover 33,7% of the total, whilst the four star market 
account for 13,5%, leaving 313 properties (less than 1%) to the luxury market 
(Federalberghi, 2010). With regard to demand, the figure 2.2 shows the trend registered
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since 1998 to the latest available data (2008), considering both domestic and 
international demand. In general, the average yearly growth rate of nights over the 20 
years was of 1.5%. Particularly important was the growth registered in 2000 (6.9%) 
mainly due to the jubilee and in 2001 (2.3%). In the following two years, the growth 
stopped because of the terroristic attacks, whilst the 2008 shows the first consequences 
of the financial crisis. 
 
Figure 2.2 Domestic and International Arrivals. Years 1998-2008 
20000000
25000000
30000000
35000000
40000000
45000000
50000000
55000000
60000000
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Domestic
International
 
Source: Elaboration on Federalberghi (2010), p. 74 
 
As displayed in figure 2.3, in the 20 years considered the 3 star market, after an increase 
in its market share in the period 1998-2008, showed a consistent trend over the 
remaining years.  
 
Figure 2.3 Hotel nights per category (1998-2008); [1998 base year = 100]. 
0
20
40
60
80
100
120
140
160
180
200
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
5, 4 stars
3 stars
1,2 stars
Average
 
Source: Elaboration on Federalberghi 2010, p.81