New Developments in the Theory of Networks

The theory of networks aims at developing theoretical views on the design and management of alliances, franchise chains, licensing, joint ventures, cooperatives, and venture capital relations. It has become a very important research field in organizational economics, organization theory and strategic management in the last decade.

The aim of the study is to explain the determinants of contractual completeness in franchise relationships by formulating and testing various propositions derived from transaction cost theory, agency theory, property rights theory, organizational capability theory and relational view of governance. The degree of contractual completeness depends on behavioural uncertainty (negatively), trust (positively), franchisees’ specific investments (negatively), environmental uncertainty (negatively), intangibility of system specific know-how (negatively) and contract design capabilities (positively). The hypotheses are tested with a data base consisting of 52 franchise systems in Austria. The empirical results support the hypotheses regarding behavioural uncertainty, trust and intangible system-specific know-how.

This article provides evidence on the determinants of delegation of decision rights in franchise relationships. We suggest that the franchisor chooses the level of delegation to leverage the intangible assets of the franchisees and the franchisor and, simultaneously, to preserve the value of the brand name. While the empirical literature on franchising has studied these effects separately, we consider them together in a model on decentralization. The results show that the franchisee’s autonomy varies negatively with the franchisor’s intangible assets and brand name and positively with the inter-firm trust and the franchisees’ intangible assets. Finally, autonomy also varies negatively with the specific investments of the franchisees.

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.

In this article, we investigate the relative performances of company-owned outlets vs. franchised outlets using an original database consisting of 231 units of a French chain. At first glance, the financial and quality performances of company-owned units are better than franchised units. However, the opposite is true when the particular characteristics of each unit are considered in account in the analysis.

This paper deals with the relationships between plural form and performance in franchising networks in Europe. It is proposed that a franchisor’s life cycle stage and human capital assets influence the relationship between plural form and performance. The model has been estimated using panel data on 41 publicly listed European franchising networks in the 1998–2007 period. The proportion of network-franchised units to the total number of its units in its distribution system is used as the indicator of its plural form (franchise proportion). Following an instrumental approach, the network performance is measured at the franchisor level by its industry-adjusted Return on Assets (ROA) and a relative stock market valuation measure of intangible human capital is used. The early results show that the impact of franchise proportion on performance is greater for franchisors with high intangible human capital compared to franchisors with low intangible human capital. Overall, results provide support for the contention that the franchisors’ performance is contingent on the “fit” between governance structure (franchise proportion) and resources (critical human assets). In contrast, evidence that the governance/performance relationship is contingent on life cycle stage or franchisor’s age is not found. However our results suggest that franchisor’s age could weaken the relationship between franchise proportion and performance. These results might suggest that younger franchisors with high human capital should increase their franchise proportion to enhance their financial performance.

For every franchise system, making the leap from the unknown to the commonplace requires a strategic plan for growth. The exogenous market perspective holds that evaluating market conditions is central to defining promising outlet locations since there are direct economic effects on performance arising specifically from location. The endogenous firm perspective (the resource-based view) and the social network approach together provide an inner strength perspective on interconnected firms; this perspective holds that access to internal and external resources offered at a certain spot determines site attractiveness, rather than location-specific market factors. This study combines both literature strands and, using a sample of 201 German franchisees, tests hypotheses (1) that explore which perspective dominates location decisions in practice, and (2) that seek to clarify the relevance of the decisive criteria for outlet performance. Results show that location decisions rely on both perspectives, yet, franchisee performance depends rather more on inner strength factors. We also find that expansion is better served by following a geographically dispersed cluster-approach, than by growing steadily from a baseline site.

The results indicate the existence of an institutional submarket within a broader market of limited-service restaurant types, where evidence for competition exists among only the leading franchised formats, with non-franchised formats exhibiting little or no effects on the overall market’s sales per establishment. Both franchisors and franchisees considering entry into a new geographic market should continue to evaluate traditional measures of sales per store, and if unavailable, examine the concentration or variety of competitors at the brand level to estimate the potential for new establishments.

A comprehensive model of international expansion is outlined and applied to determine the optimal country to be targeted for entry by a US hotel firm and the optimal entry mode to be used. Using a strategic, sequential process, the model performs three levels of assessment: a macro assessment that identifies the major external environmental variables in order to determine the risks and opportunities of international expansion; a micro assessment where environmental variables capturing the countries’ local market conditions and the firm’s specific characteristics are utilized to estimate potential profitability and net present value; and an assessment of the market entry strategy that would be optimal for the target market under consideration.

To illustrate how this international expansion assessment model can be used, the three levels of assessment are sequentially applied to a hypothetical US-based hotel company that is representative of major US hotel firms. Though only 12th in the ranking of the top desirable expansion destinations from a macro opportunity/risk perspective, China moves to the top after the micro (country/industry/firm) assessment. For a US-based hotel company, it is determined that expansion into the China mid-market segment through management contracts would provide the optimal value for this firm.

By helping managers to quickly identify the optimal country in which to expand from a universe of close to 200 potential targets, the model illustrated here can significantly reduce the time and cost to develop and implement a firm’s international expansion strategy and reduce potential risks of failure and loss.

This study highlights the need for a strategic approach to international expansion decisions and the central role that risk assessment and risk management can play in these decisions. It also underscores the importance of country-specific macro-environmental and micro-environmental factors.

This essay takes an entrepreneurship viewpoint toward franchising. The applicability of the general theory of entrepreneurship presented by Shane (“A general theory of entrepreneurship. The individual-opportunity nexus”. Edward Elgar, Cheltenham, 2003) is explored in the franchising context. Shane introduced a model of the entrepreneurial process in response to the failure of prior research to provide one. According to Shane, prior research has tended to look at only part of the entrepreneurial process, with the result that no general theory of entrepreneurship has been developed. Studies that consider franchising as a form of entrepreneurship are rare, as are studies on the entrepreneurial process of a franchisee. This conceptual study examines whether Shane’s framework is applicable to franchising research, and why. The proposals put forward here have implications for franchising researchers, franchisors, people interested in becoming franchisees, and for organisations planning to franchise their business.

As franchising increases its influence internationally, regulators increasingly face the challenge of the appropriate manner of its regulation. A recent Australian report has focussed attention on an obligation of good faith as an appropriate regulatory strategy to address opportunistic conduct and has concluded that while the prior disclosure obligations of Australia’s regulatory instrument for franchising (the Franchising Code of Conduct) are for the most part adequately addressed, there remain concerns because of the ‘continuing absence of an explicit overarching standard of conduct for parties entering a franchise agreement’. The Opportunity not opportunism report of the Parliamentary Joint Committee on Corporations and Financial Services (December 2008) recommended that the optimal way to provide a deterrent against opportunistic conduct in the franchising sector was ‘to explicitly incorporate, in its simplest form, the existing and widely accepted implied duty of parties to a franchise agreement to act in good faith’. In November 2009 the Australian Government rejected this recommendation on the basis that it would ‘increase uncertainty in franchising’. This paper explores the challenges faced in grafting the civil law concept of good faith onto a common law system. It suggests that in Australia and other common law jurisdictions – and even in civil law jurisdictions – good faith is more an elusive ideal than a well settled commercial standard and that issues of definition, scope and application may frustrate its intended application in the franchising context.

Compulsory franchising regulation in Spain was introduced in 1998. Until then, franchising had had no specific regulation and was regulated by general commercial laws. This paper examines the effect of the change from a general regulation to a franchise-specific legislation on survival rates and discontinuance rates in the Spanish market. We use a descriptive methodology and a comparison between survival curves. After controlling for time-in-market, results suggest that, after regulation, there is an increase in the organizational failure rates but a decrease in discontinuance rates. Furthermore, regulation affects foreign franchisors slightly more negatively than domestic ones and the reaction of growing firms is different from that of firms with negative growth.

The paper integrates and extends insights from relational exchange theory and value exchange model to discuss the efficacy of relational governance and value-creating relational investments to affect certain revenue-enhancing (relational) behaviours. It is postulated that value-creating relational investments made in a highly relational environment successful enough to engender high relationship quality (manifested through total partner satisfaction and inter-organizational trust) result in higher interorganizational commitment. This commitment ultimately translates into superior performance of the focal firm since partners exhibit revenue-enhancing behaviours like longevity of relationship, increased business share, positive word-of-mouth and reduced partial defection. It is further argued that the dynamics of model may vary across different phases of relationship life cycle and are moderated by the nodes’ relational polygamy.

Through an empirical study on new innovative entrepreneurial firms, we test the hypothesis that there are positive complementarities between firms’ networked access to human, technical and financial resources and the networked growth of those firms. This “double network hypothesis” supports a view of entrepreneurial firms generating value through shifting combinations of resources and growing by external networks, rather than as a necessarily unique combination of highly specific resources. In addition, the test of complementarities between types of networks bringing resources to the firm and types of networks through which growth occurs, contributes a much needed specification of the sources of complementarities among organizational practices, at least as far as network practices are concerned.

Joint R&D projects have long been studied as an important determinant of innovation success. Researchers have highlighted the benefits that such technological projects offer to partners and to their industries and countries. However, the multiple interactions involved in joint R&D projects in order to achieve the common objectives are not fully understood. Such complexity justifies the need to seek adequate methodologies for determining the project attributes that will lead to an explanation of how joint R&D projects operate. In this paper we introduce ideas about the structure and organization of joint R&D projects in order to explore how attributes and properties of networks influence the attainment of R&D project objectives. The Delphi approach allows a detailed look at the functioning of networks which are much more difficult to capture in traditional, linear analytical models. We tested the measures in the context of the European sponsored R&D projects developed within Framework Programmes.

Dynamic changes in the structure of value-added chains lead to an enhancement of innovations of SMEs (small and medium sized enterprises) and therewith to an impact of the national economies. In the European context the support of the innovation process of SMEs is a goal of the economic policy. In this context private and public consultancies should provide advice for the innovation management of SMEs. This is to some extent politically introduced but the offer of advisory service is seldom used. The integration of consultancies leads to weak relations in the cooperating innovation network and so the risk of losing the competitive edge increases. Based on a Danish–German dataset, this contribution addresses the question of which conditions initiate and impede the utilization of the consulting system from a business point of view. We found that both Danish and German SMEs utilize far more strong than weak ties when it comes to choosing cooperation partners, but at the same time the Danish SMEs manage to exploit the range of services offered by consultancies better.

In this paper, we develop a knowledge-based view on the organization of knowledge transfer in clusters. Starting from the information richness theory, we argue that tacitness of the partners’ knowledge determines the information richness of the knowledge transfer mechanisms in clusters. We examine the following hypotheses: (a) If the cluster partners’ knowledge is characterized by a low degree of tacitness, knowledge transfer mechanisms with a lower degree of information richness (e.g. email, intranet, documents, newsgroups) are used; (b) if the cluster partners’ knowledge is characterized by a high degree of tacitness, knowledge transfer mechanisms with a higher degree of information richness (e.g. seminars, workshops, formal meetings) are used. We test these hypotheses by using data from the Green Building Cluster of Lower Austria. Using complexity, teachability and codifiability as measures for tacitness of the cluster partners’ knowledge, the empirical results from Green Building Cluster in Austria partly support these hypotheses. Our results indicate that an increase in teachable knowledge results in the use of more knowledge transfer mechanisms with a lower degree of information richness, and an increase in complex, but articulable knowledge results in the use of more knowledge transfer mechanisms with a higher degree of information richness. In addition, we show that trust positively influences the use of all modes of knowledge transfer.

The aim of this research is to investigate the importance of network age for learning and knowledge transfer among network members. The research is carried out through multiple exploratory case study analysis. It shows that network age per se does not have adequate power to explain learning processes occurring within a network. Age is an important factor of learning, but only as part of a broader concept associated with the evolution of the network, and therefore not directly connected with learning. We recognize this in defining the concept of network maturity. Network maturity is a function of network age, pre-existing experience in working together, and the development of social networks among the employees of organisations that form the network.

A cooperative business consists of a cooperative society and a cooperative business firm. The society of members intends to control the business in such a way as to focus the business operations on its interests. The two organizational units tend, however, to follow different behavioral logics. Borrowing some core concepts from classical sociology, Gemeinschaft norms rule within the memberships, while Gesellschaft norms dominate the business firms. Thereby it may be difficult to accomplish alignment between the membership organization and the business organization in order to be competitive. This paper addresses the difficulties of following the different logics by exploring Gemeinschaft and Gesellschaft within agricultural cooperatives with a focus on the membership logics.

Based on a network model of social capital, we derive a set of hypotheses on the formation of social capital among activists engaging in community-based co-operatives for public service delivery. The hypotheses are subsequently tested in a large-scale questionnaire survey in Austria. The results of our study support the findings of Granovetter (1973) and Burt (2001) on the importance of weak ties and structural holes in social networks. On the one hand, critical resources for a community-based co-operative can be found in the acquaintance networks rather than friend or family networks of residents. On the other hand, the paper identifies co-operatives as a suitable form of organising community-based initiatives. Its flexible and open network structure allows the bridging of structural holes within and outside the community, which facilitates necessary information and resource flows. Our analysis provides valuable insights for policy makers concerned with fostering community engagement through co-operatives. Furthermore, the authors contribute to the debate on social capital and its relation to civic participation and the community context.