The Effects of New Franchisor Partnering Strategies on Franchise System Size

Many young firms use strategic actions to attract partners who help them increase the size of their operations quickly. This article examines the use of strategic actions to attract partners and increase system size in the context of franchising. We build on research in entrepreneurship, marketing, organization theory, strategic management, and finance to develop specific hypotheses about the influences of franchisor pricing policy and strategic control decisions on system size. We test these hypotheses empirically, using panel data on a sample of 1,292 business format franchise systems from 152 industries that were established in the United States between 1979 and 1996 and followed from their inception forward in time. Our model accounts for the endogeneity of strategic decisions, controls for unobserved firm and industry factors, and accounts for selection effects due to system failure. The results show that franchisors that grow larger (1) lower royalty rates as the systems age, (2) have low up-front franchise fees that rise over time, (3) own a small proportion of outlets and lower that percentage over time, (4) keep franchisees initial investment low, and (5) finance their franchisees.

[1]  Lung-fei Lee.  Generalized Econometric Models with Selectivity , 1983 .

[2]  Eric Gedajlovic,et al.  Vertical integration in Franchise systems: Agency theory and resource explanations , 1991 .

[3]  P. Kaufmann,et al.  Structural and strategic dynamics in franchising , 2003 .

[4]  Peter E. Kennedy.  A Guide to Econometrics , 1979 .

[5]  H. Demsetz,et al.  Production, Information Costs, and Economic Organization , 1975, IEEE Engineering Management Review.

[6]  James A. Brickley,et al.  The choice of organizational form The case of franchising , 1987 .

[7]  J. Hausman.  Specification tests in econometrics , 1978 .

[8]  Preyas S. Desai,et al.  Demand signalling under unobservable effort in franchising: linear and nonlinear price contracts , 1995 .

[9]  P. Geroski.  What do we know about entry , 1995 .

[10]  Patrick J. Kaufmann,et al.  The Evolution of Ownersip Patterns in Franchise Systems , 1994 .

[11]  Francine Lafontaine.  Agency Theory and Franchising: Some Empirical Results , 1992 .

[12]  David J. Ketchen,et al.  Can Capital Scarcity Help Agency Theory Explain Franchising? Revisiting the Capital Scarcity Hypothesis , 1999 .

[13]  G. Castrogiovanni,et al.  Franchise Failure Rates: An Assessment of Magnitude and Influencing Factors , 1993 .

[14]  Joel A. C. Baum,et al.  Survival-enhancing learning in the Manhattan hotel industry , 1998 .

[15]  John F. Love,et al.  McDonald's: Behind The Arches , 1986 .

[16]  Hayne E. Leland,et al.  INFORMATIONAL ASYMMETRIES, FINANCIAL STRUCTURE, AND FINANCIAL INTERMEDIATION , 1977 .

[17]  Pierre Azoulay,et al.  Entrepreneurs, Contracts, and the Failure of Young Firms , 2001, Manag. Sci..

[18]  A. Paswan,et al.  What we know about ownership redirection in franchising: A meta-analysis , 1996 .

[19]  Alan B. Krueger,et al.  Ownership, Agency, and Wages: An Examination of Franchising in the Fast Food Industry , 1991 .

[20]  Jesper B. Sørensen,et al.  Finding the right mix: franchising, organizational learning, and chain performance , 2001 .

[21]  Patrick J. Kaufmann,et al.  Costs of Control: The Source of Economic Rents for McDonald's Franchisees , 1994, The Journal of Law and Economics.

[22]  Richard Thompson.  The franchise life cycle and the Penrose effect , 1994 .

[23]  Toby E. Stuart,et al.  Interorganizational Endorsements and the Performance of Entrepreneurial Ventures , 1999 .

[24]  Robert E. Martin.  Franchising and Risk Management , 1988 .

[25]  Scott Shane,et al.  New Firm Survival: Institutional Explanations for New Franchisor Mortality , 1999 .

[26]  Nancy Gallini,et al.  Dual Distribution and Royalty Fees in Franchising , 1992 .

[27]  W. Powell,et al.  Interorganizational Collaboration and the Locus of Innovation: Networks of Learning in Biotechnology. , 1996 .

[28]  J. Brüderl,et al.  Survival Chances of Newly Founded Business Organizations , 1992 .

[29]  J. Barney.  Firm Resources and Sustained Competitive Advantage , 1991 .

[30]  O. Shenkar,et al.  Reputation, Image, Prestige, and Goodwill: An Interdisciplinary Approach to Organizational Standing , 1997 .

[31]  Scott Shane,et al.  Explaining the Distribution of Franchised and Company-Owned Outlets in Franchise Systems , 1998 .

[32]  R. Caves.  Industrial Organization and New Findings on the Turnover and Mobility of Firms , 1998 .

[33]  S. Shane.  Making New Franchise Systems Work , 1998 .

[34]  Brian D. Wright,et al.  Technology Transfer under Asymmetric Information , 1990 .

[35]  K. Shaw,et al.  Targeting Managerial Control: Evidence from Franchising , 2001 .

[36]  P. Kaufmann,et al.  The pricing of franchise rights , 2001 .

[37]  S. Shane.  Hybrid Organizational Arrangements and Their Implications for Firm Growth and Survival: A Study of New Franchisors , 1996 .

[38]  C. Fombrun,et al.  What's in a Name? Reputation Building and Corporate Strategy , 1990 .

[39]  James A. Brickley,et al.  An Agency Perspective on Franchising , 1991 .

[40]  R. Lal,et al.  Contractual Arrangements in Franchising: An Empirical Investigation , 1995 .

[41]  Nancy E. Grund.  Reputation: Realizing Value from the Corporate Image , 1996 .

[42]  K. Eisenhardt,et al.  Resource-based View of Strategic Alliance Formation: Strategic and Social Effects in Entrepreneurial Firms , 1996 .

[43]  Robert Wuthnow,et al.  Reputational Status of Organizations in Technical Systems , 1988, American Journal of Sociology.

[44]  Seth W. Norton,et al.  An Empirical Look at Franchising as an Organizational Form , 1988 .

[45]  Barton A. Weitz,et al.  The Use of Pledges to Build and Sustain Commitment in , 1992 .

[46]  Joel A. C. Baum,et al.  Chain Affiliation and the Failure of Manhattan Hotels, 1898-1980 , 1997 .

[47]  A. Kalnins.  An Empirical Analysis of Territorial Encroachment Within Franchised and Company-Owned Branded Chains , 2004 .

[48]  R. Lal.  Improving Channel Coordination Through Franchising , 1990 .

[49]  Kathryn L. Shaw,et al.  The Dynamics of Franchise Contracting: Evidence from Panel Data , 1999, Journal of Political Economy.

[50]  Eric D. Darr,et al.  The Acquisition, Transfer, and Depreciation of Knowledge in Service Organizations: Productivity in Franchises , 1995 .

[51]  Francine Lafontaine.  Contractual Arrangements as Signaling Devices: Evidence from Franchising , 1993 .

[52]  A. Bhide.  The Origin and Evolution of New Businesses , 2000 .

[53]  Frank A. ScottJr..  Franchising vs. company ownership as a decision variable of the firm , 1995 .

[54]  Zvi Griliches.  Data Problems in Econometrics , 1984 .