3. The Emergence of Franchising

This chapter is largely theoretical in nature and explores the conditions and environmental context necessary for franchising to emerge. What drives the introduction of franchising? This question is explored with engagement of the franchising literature and literature from the industry evolution field. The reality is that most of the franchising literature relates to the emergence of franchising from the perspective of the firm. The decision to franchise has been a subject of interest for students of the economics of organisations and thus at the level of the firm for many years. Initial and still-insightful works are Caves and Murphy (1976) and Rubin (1978). Lafontaine and Shaw (1998) reviewed much of the empirical literature from economics and highlighted agency theory as a motivation for franchising; further amplification and analysis can be found in Blair and Lafontaine (2005). Most franchising research has been grounded in either resource scarcity theory or agency theory and also transaction cost economics. In addition variation, selection, and retention is explored in this chapter and is an evolutionary process which can trigger firms to adopt franchising. The answer to the emergence question aims to explain why firms adopt franchising and what they plan to achieve by doing so. For example, variation in an industry can be created by increasing demand for branding and high levels of product and service standards. If this happens, franchised firms can either influence this new selection criterion or facilitate their franchisees to comply with it in order to survive. This question also raises the issue of the role of agency and the involvement of entrepreneurs as addressed by the franchising literature with regard to the introduction of franchising at firm level. Furthermore as long as this selection criterion remains important, franchising firms and their franchisees will be retained in the industry.