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2011 | OriginalPaper | Buchkapitel

Allocation of Decision Rights in International Franchise Firms: The Case of Master and Direct Franchising

verfasst von : Nada Mumdžiev

Erschienen in: New Developments in the Theory of Networks

Verlag: Physica-Verlag HD

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Abstract

In international franchising the control over franchisees’ actions is becoming increasingly difficult. Franchisors must allocate a certain portion of decision rights to franchisees to enable effective decision making and maximize residual income, while still retaining control over the network. This conceptual paper combines the perspectives of the property rights, agency theory and transaction cost theory to reveal the differences in the allocation of decision rights between master franchising and direct/multi-unit franchising, as well as to understand the franchisors’ choice between these two modes when entering new markets. The property rights theory predicts that the allocation of residual decision rights depends on the impact of intangible knowledge assets on the residual surplus generation. The agency theory hypothesis suggests that the decision rights allocation is influenced by the monitoring costs due to the information asymmetry between the headquarters and the foreign local partners. The analysis involves two determinants of monitoring costs: the geographic and cultural distances of the host markets. Finally, under the transaction costs view, attention is directed towards environmental and behavioral uncertainty, as determinants of the entry mode choice and the allocation of decision rights.

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Vorheriges Kapitel Delegation and Autonomy in Franchising

Nächstes Kapitel Incentives and Control in Company-Owned Versus Franchised Outlets: An Empirical Study at the Chain Level

The definition accepted from the US Department of Commerce identifies two types of “franchising”: (1) “Product and trade name franchising” which represents an independent sales relationship between supplier and dealer in which the dealer[s] acquire[s] some of the identity of the supplier. (2) “Business-format franchising” which is characterized by an ongoing business relationship between franchisor and franchisee and includes not only the product, service and trademark, but the entire business format itself.

Incomplete contractibility is the key assumption of the GHM model (Grossman and Hart 1986; Hart and Moore 1990) which is accepted by the property rights view. Property rights theory sees intangible knowledge as a key asset which determines the ex post bargaining positions in the absence of complete contractibility (Brynjolfsson, 1994).

Burton et al. (2000) measured geographic distance in air miles between the headquarters and the capital city of the host country. Fladmoe-Lindquist and Jacque (1995) used the air travel time (minimal flight time plus transfer time) between the corporate headquarters and the country of the unit operations to operationalize the variable of geographic distance. Furthermore, Kalnins and Lafontaine (2004) measured geographic distance as the natural log of the minimum Euclidean distance in miles between the new unit and any of that franchisee’s existing units at the time when new unit became available. Moreover, because monitoring activities may be based at headquarters, they also included the natural log of the distance between the franchisee's headquarters and the new unit.

A widely used approach for measuring cultural distance was developed by Hofstede (1980). The cultural distance was measured on a large sample by eliciting the perception of four work-related dimensions (subsequently used by Brouthers and Brouthers 2001, Kogut and Singh 1988, Morosini et al. 1998). Another frequently applied framework was developed by Ronen and Shenkar (1985), who defined eight cultural clusters (groups) of countries according to their cultural similarities (applied by Fladmoe-Lindquist and Jacque 1995, Gatingon and Anderson 1988). Taylor et al. (1998) developed a scale of four business-related items to measure cultural distance (applied also by Chen 2007).

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Titel: Allocation of Decision Rights in International Franchise Firms: The Case of Master and Direct Franchising
verfasst von: Nada Mumdžiev
Verlag: Physica-Verlag HD
Buch: New Developments in the Theory of Networks
Print ISBN: 978-3-7908-2614-2

Electronic ISBN: 978-3-7908-2615-9

Copyright-Jahr: 2011
DOI: https://doi.org/10.1007/978-3-7908-2615-9_4

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