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Trust, transaction costs and contractual incompleteness in franchising

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Abstract

The aim of this study is to address empirically the degree of contractual completeness in franchising by combining transaction cost and relational governance perspectives. First, the ratio of specific and residual decision rights is developed as a measure of contractual completeness. Second, we extend the transaction cost perspective of contractual completeness in franchising by arguing that the franchisor’s and franchisees’ investments have a negative effect on contractual completeness under bilateral dependence and a positive effect under unilateral dependence. Third, we complement the transaction cost perspective by developing new hypotheses regarding the impact of general and knowledge-based trust on contractual completeness. General trust of the franchisor reduces the franchisor’s perception of relational risk and hence the necessity to control the network relationship by more complete contract planning, and knowledge-based trust increases information sharing between the partners and hence the knowledge base for specifying more detailed contracts. The data from the German franchise sector provide some support of the hypotheses.

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Authors and Affiliations

  1. Rotterdam School of Management, Erasmus University, P.O. Box 1738, 3000 DR, Rotterdam, The Netherlands

    George Hendrikse

  2. Department of Business Administration, University of Vienna, Oskar-Morgenstern-Platz 1, 1090, Vienna, Austria

    Patrick Hippmann & Josef Windsperger

Authors
  1. George Hendrikse
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  2. Patrick Hippmann
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  3. Josef Windsperger
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Correspondence to Josef Windsperger.

Appendix: Measures of variables

Appendix: Measures of variables

Index of contractual completeness (COMPLETENESS). The general managers were asked to rate the degree of contractual completeness with the following indicators:

  1. (a)

    Specific decision rights (sDR): “The tasks of the franchisor regarding the value chain activities at the local outlets are specified in detail in the contract”; “the tasks of the franchisees regarding the value chain activities at the local outlets are specified in detail in the contract.” Two items, measured on a seven-point Likert-type scale (1 strongly disagree–7 strongly agree), Cronbach’s alpha = 0.871.

  2. (b)

    Residual decision rights (rDR): “The decisions of the franchisor regarding the value chain activities at the local outlets are specified in detail in the contract”; “the decisions of the franchisees regarding the value chain activities at the local outlets are specified in detail in the contract.” Two items, measured on a seven-point Likert-type scale (1 strongly disagree–7 strongly agree), Cronbach’s alpha = 0.909.

Environmental uncertainty (ENV). Three items, measured on a seven-point Likert-type scale (1 strongly disagree–7 strongly agree), Cronbach’s alpha = 0.742

  1. 1.

    The sales at the outlet level are very fluctuating.

  2. 2.

    It is very difficult to predict the market development at the outlet level.

  3. 3.

    The economic environment in the local market changes frequently.

Franchisee transaction-specific investments (INV_FEE). Initial investments required to start a new franchised outlet.

Franchisor transaction-specific investments (INV_FOR). Three items, measured on a seven-point Likert-type scale: To which extent the franchisor has to bear the following expenses (1 not at all–7 to a very great extent), Cronbach’s alpha = 0.632

  1. 1.

    Franchisee training at the beginning of the contract period.

  2. 2.

    Technical support at the beginning of the contract period.

  3. 3.

    Setup of the outlet organization.

Franchisor brand name (BRAND). Four items, measured on a seven-point Likert-type scale (1 strongly disagree–7 strongly agree), Cronbach’s alpha = 0.811

  1. 1.

    Our brand is very strong compared with our competitors.

  2. 2.

    Our franchise system enjoys higher brand recognition compared with our competitors.

  3. 3.

    Our franchise system enjoys a good reputation for quality.

  4. 4.

    Our brand name is very important for us for achieving competitive advantage.

Trust

Knowledge-based trust (KTRUST)

Four items, measured on a seven-point Likert-type scale (1 strongly disagree–7 strongly agree), Cronbach’s alpha = 0.876

  1. 1.

    The cooperation is based on partnership basis.

  2. 2.

    The exchange of information between us and the partners goes beyond the agreed scope.

  3. 3.

    There is great trust between us and the partners.

  4. 4.

    There is an atmosphere of openness and honesty between us and the partners.

General trust (GTRUST)

Three items, measured on a seven-point Likert-type scale (1 strongly disagree–7 strongly agree), Cronbach’s alpha = 0.806

  1. 1.

    The majority of people trust others.

  2. 2.

    Most people are trustworthy.

  3. 3.

    Most people behave cooperatively if they are trusted.

Sector (SEC). 0 = Product franchising firms; 1 = Services firms

Size (SIZE). Number of outlets in the franchise system (franchised + company owned)

Age (AGE). Number of years since opening up the first franchised outlet in Germany

Contract duration (DUR). Length of the contract in years

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Hendrikse, G., Hippmann, P. & Windsperger, J. Trust, transaction costs and contractual incompleteness in franchising. Small Bus Econ 44, 867–888 (2015). https://doi.org/10.1007/s11187-014-9626-9

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