The Dual Network Structure of Franchising Firms Property Rights, Resource Scarcity and Transaction Cost Explanations

Abstract

This paper formulates and tests various hypotheses from various theories regarding the dual network structure of franchising firms. First, by applying the property rights theory we argue that the contractual mix between company-owned and franchised outlets depends on the distribution of intangible assets between the franchisor and franchisee. The more important the franchisor’s system-specific assets relative to the franchisee’s local market assets for the generation of residual income, the more ownership rights should be transferred to him, and the higher is the percentage of company-owned outlets. Second, we compare these results with the resource scarcity and transaction cost view. According to the resource scarcity view, the proportion of company-owned outlets varies negatively with the franchisor’s restraints in financial, informational and management resources. In addition, transaction cost theory states that the franchisee’s specific investments (as bonding mechanism) mitigate the hold-up risk for the franchisor resulting in a lower degree of vertical integration. These hypotheses are tested by using data from the Austrian franchise sector. The empirical results are generally supportive of the property rights hypothesis. In addition, the informational restraint hypothesis is compatible with the property rights hypothesis regarding the influence of franchisee’s local market know-how advantage on the percentage of company-owned outlets. On the other hand, the financial restraint and transaction cost hypotheses are not supported by our data. These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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