Skip to main content
Top

2017 | OriginalPaper | Chapter

7. The Theory of Franchising

Activate our intelligent search to find suitable subject content or patents.

search-config
loading …

Abstract

Franchising is a business model decision. The franchise model provides leveraged growth and entrepreneurial flexibility when the firm’s cash flow is uncertain. The theory of franchising provides firm-specific and location-specific conditions that explain when and why some firms franchise and others do not. The firm-specific conditions suggest that when the cash flow appropriability is more uncertain, the firm may choose to franchise the outlets; thus, the rate of franchising will be higher. The location-specific conditions suggest that unless the demand variability is low and the demand externality high, the franchisor will choose to franchise the outlets in the region, not own them. Franchisees possess high-powered entrepreneurial incentives that provide an entrepreneurial surplus. The franchising mechanism provides entrepreneurial leverage to enhance and sustain the firm’s competitive position when the cash flow appropriability is more uncertain and the firm’s economic rent is subject to competitive dissipation.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

  • über 102.000 Bücher
  • über 537 Zeitschriften

aus folgenden Fachgebieten:

  • Automobil + Motoren
  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Elektrotechnik + Elektronik
  • Energie + Nachhaltigkeit
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Maschinenbau + Werkstoffe
  • Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

  • über 67.000 Bücher
  • über 340 Zeitschriften

aus folgenden Fachgebieten:

  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Versicherung + Risiko




Jetzt Wissensvorsprung sichern!

Literature
go back to reference Barney, J. 1991. Firm resources and sustained competitive advantage. Journal of Management, 17: 99–120.CrossRef Barney, J. 1991. Firm resources and sustained competitive advantage. Journal of Management, 17: 99–120.CrossRef
go back to reference Bradach, J.L. 1997. Using the plural form in the management of restaurant chains. Administrative Science Quarterly, 42: 276–303.CrossRef Bradach, J.L. 1997. Using the plural form in the management of restaurant chains. Administrative Science Quarterly, 42: 276–303.CrossRef
go back to reference Brickley, J.A. 1999. Incentive conflicts and contractual restraints: Evidence from franchising. Journal of Law and Economics, 42: 745–774.CrossRef Brickley, J.A. 1999. Incentive conflicts and contractual restraints: Evidence from franchising. Journal of Law and Economics, 42: 745–774.CrossRef
go back to reference Brickley, J.A., and Dark, F.H. 1987. The choice of the organizational form: The case of franchising. Journal of Financial Economics, 18: 401–420CrossRef Brickley, J.A., and Dark, F.H. 1987. The choice of the organizational form: The case of franchising. Journal of Financial Economics, 18: 401–420CrossRef
go back to reference Brickley, J.A., Dark, F., and Weisbach, M. 1991. An agency perspective on franchising. Financial Management, 20: 27–35.CrossRef Brickley, J.A., Dark, F., and Weisbach, M. 1991. An agency perspective on franchising. Financial Management, 20: 27–35.CrossRef
go back to reference Carney, M., and Gedajlovic, E. 1991. Vertical integration in franchise systems: Agency theory and resource explanations. Strategic Management Journal, 12: 607–629.CrossRef Carney, M., and Gedajlovic, E. 1991. Vertical integration in franchise systems: Agency theory and resource explanations. Strategic Management Journal, 12: 607–629.CrossRef
go back to reference Castrogiovanni, G.J., Combs, J. G., and Justis, R.T. 2006. Shifting imperatives: An integrated view of resource scarcity and agency reasons for franchising. Entrepreneurship Theory and Practice, 30: 23–40.CrossRef Castrogiovanni, G.J., Combs, J. G., and Justis, R.T. 2006. Shifting imperatives: An integrated view of resource scarcity and agency reasons for franchising. Entrepreneurship Theory and Practice, 30: 23–40.CrossRef
go back to reference Caves, R.E., and Murphy, W.F. 1976. Franchising: Firms, markets, and intangible assets. Southern Economic Journal, 42: 572–586.CrossRef Caves, R.E., and Murphy, W.F. 1976. Franchising: Firms, markets, and intangible assets. Southern Economic Journal, 42: 572–586.CrossRef
go back to reference Combs, J.G., and Ketchen, D.J. 1999. Can capital scarcity help agency theory explain franchising? Revisiting the capital scarcity hypothesis. Academy of Management Journal, 42: 196–207.CrossRef Combs, J.G., and Ketchen, D.J. 1999. Can capital scarcity help agency theory explain franchising? Revisiting the capital scarcity hypothesis. Academy of Management Journal, 42: 196–207.CrossRef
go back to reference Dant, R.P., and Kaufman, P.J. 2003. Structural and strategic dynamics in franchising. Journal of Retailing, 79, 63–75.CrossRef Dant, R.P., and Kaufman, P.J. 2003. Structural and strategic dynamics in franchising. Journal of Retailing, 79, 63–75.CrossRef
go back to reference Gallini, N.T., and Lutz, N.A. 1992. Dual distribution and royalty fees in franchising. Journal of Law, Economics, & Organization, 8: 471–501. Gallini, N.T., and Lutz, N.A. 1992. Dual distribution and royalty fees in franchising. Journal of Law, Economics, & Organization, 8: 471–501.
go back to reference Lafontaine, F. 1992. Agency theory and franchising: Some empirical results. Rand Journal of Economics, 23: 263–283.CrossRef Lafontaine, F. 1992. Agency theory and franchising: Some empirical results. Rand Journal of Economics, 23: 263–283.CrossRef
go back to reference Lafontaine, F. 1993. Contractual arrangements as signaling devices: Evidence from franchising. Journal of Law, Economics, and Organization, 9: 256–289. Lafontaine, F. 1993. Contractual arrangements as signaling devices: Evidence from franchising. Journal of Law, Economics, and Organization, 9: 256–289.
go back to reference Lafontaine, F., and Shaw, K.L. 1999. The dynamics of franchising contracting: Evidence from panel data. Journal of Political Economy, 107: 1041–1080.CrossRef Lafontaine, F., and Shaw, K.L. 1999. The dynamics of franchising contracting: Evidence from panel data. Journal of Political Economy, 107: 1041–1080.CrossRef
go back to reference Lafontaine, F., and Shaw, K.L. 2005. Targeting managerial control: Evidence from franchising. Rand Journal of Economics, 36: 131–150. Lafontaine, F., and Shaw, K.L. 2005. Targeting managerial control: Evidence from franchising. Rand Journal of Economics, 36: 131–150.
go back to reference Martin, R.E. 1988. Franchising and risk management. American Economic Review, 78: 954–968. Martin, R.E. 1988. Franchising and risk management. American Economic Review, 78: 954–968.
go back to reference Michael, S.C. 1996. To franchise or not to franchise: An analysis of decision rights and organizational form shares. Journal of Business Venturing, 11: 57–71.CrossRef Michael, S.C. 1996. To franchise or not to franchise: An analysis of decision rights and organizational form shares. Journal of Business Venturing, 11: 57–71.CrossRef
go back to reference Minkler, A.P, and Park, T.A. 1994. Asset specificity and vertical integration. Review of Industrial Organization, 9: 409–423.CrossRef Minkler, A.P, and Park, T.A. 1994. Asset specificity and vertical integration. Review of Industrial Organization, 9: 409–423.CrossRef
go back to reference Minkler, A.P. 1992. Why firms franchise: A search cost theory. Journal of Institutional and Theoretical Economics, 148: 240–259. Minkler, A.P. 1992. Why firms franchise: A search cost theory. Journal of Institutional and Theoretical Economics, 148: 240–259.
go back to reference Mishra, C.S. 2015. Getting funded: Proof-of-concept, due diligence, risk and reward. New York: Palgrave Macmillan.CrossRef Mishra, C.S. 2015. Getting funded: Proof-of-concept, due diligence, risk and reward. New York: Palgrave Macmillan.CrossRef
go back to reference Mishra, C.S., and Zachary, R.K. 2014. The theory of entrepreneurship: Creating and sustaining entrepreneurial value. New York: Palgrave Macmillan.CrossRef Mishra, C.S., and Zachary, R.K. 2014. The theory of entrepreneurship: Creating and sustaining entrepreneurial value. New York: Palgrave Macmillan.CrossRef
go back to reference Mishra, C.S., and Zachary, R.K. 2015. The theory f entrepreneurship. Entrepreneurship Research Journal, 5: 251–268.CrossRef Mishra, C.S., and Zachary, R.K. 2015. The theory f entrepreneurship. Entrepreneurship Research Journal, 5: 251–268.CrossRef
go back to reference Norton, S.W. 1988. An empirical look at franchising as an organizational form. Journal of Business, 61: 197–218.CrossRef Norton, S.W. 1988. An empirical look at franchising as an organizational form. Journal of Business, 61: 197–218.CrossRef
go back to reference Oxenfeldt, A.R., and Kelly, A.O. 1969. Will successful franchise systems ultimately become wholly-owned chains? Journal of Retailing, 44 (4): 69–83. Oxenfeldt, A.R., and Kelly, A.O. 1969. Will successful franchise systems ultimately become wholly-owned chains? Journal of Retailing, 44 (4): 69–83.
go back to reference Penrose, E. 1959. The theory of the growth of the firm. New York: Wiley. Penrose, E. 1959. The theory of the growth of the firm. New York: Wiley.
go back to reference Polanyi, M. 1967. The tacit dimension. Garden City, NY: Anchor. Polanyi, M. 1967. The tacit dimension. Garden City, NY: Anchor.
go back to reference Prendergast, C. 2002. The tenuous trade-off between risk and incentives. Journal of Political Economy, 110: 1071–1102.CrossRef Prendergast, C. 2002. The tenuous trade-off between risk and incentives. Journal of Political Economy, 110: 1071–1102.CrossRef
go back to reference Reed, R., and DeFillippi, R.J. 1990. Causal ambiguity, barriers to imitation, and sustainable competitive advantage. Academy of Management Review, 15: 88–102. Reed, R., and DeFillippi, R.J. 1990. Causal ambiguity, barriers to imitation, and sustainable competitive advantage. Academy of Management Review, 15: 88–102.
go back to reference Rubin, P.H. 1978. The theory of the firm and the structure of the franchise contract. Journal of Law and Economics, 21: 223–234.CrossRef Rubin, P.H. 1978. The theory of the firm and the structure of the franchise contract. Journal of Law and Economics, 21: 223–234.CrossRef
go back to reference Sen, K.C. 1993. The use of initial fees and royalties in business-format franchising. Managerial and Decision Economics, 14: 175–190.CrossRef Sen, K.C. 1993. The use of initial fees and royalties in business-format franchising. Managerial and Decision Economics, 14: 175–190.CrossRef
go back to reference Shane, S.A. 1996. Hybrid organizational arrangements and their implications for firm growth and survival: A study of new franchisors. Academy of Management Journal, 39: 216–234.CrossRef Shane, S.A. 1996. Hybrid organizational arrangements and their implications for firm growth and survival: A study of new franchisors. Academy of Management Journal, 39: 216–234.CrossRef
go back to reference Thompson, R.S. 1994. The franchise life cycle and the Penrose effect. Journal of Economic Behavior and Organization, 24: 207–218.CrossRef Thompson, R.S. 1994. The franchise life cycle and the Penrose effect. Journal of Economic Behavior and Organization, 24: 207–218.CrossRef
go back to reference Williamson, O.E. 1985. The economic institutions of capitalism. New York: Free Press. Williamson, O.E. 1985. The economic institutions of capitalism. New York: Free Press.
go back to reference Windsperger, J., and Dant, R.P. 2006. Contractability and ownership redirection in franchising: A property rights view. Journal of Retailing, 82: 259–272.CrossRef Windsperger, J., and Dant, R.P. 2006. Contractability and ownership redirection in franchising: A property rights view. Journal of Retailing, 82: 259–272.CrossRef
Metadata
Title
The Theory of Franchising
Author
Chandra S. Mishra
Copyright Year
2017
DOI
https://doi.org/10.1007/978-3-319-54540-0_7

Premium Partner