Contractibility and Ownership Redirection in Franchising: A Property Rights View

Abstract

This paper offers a property rights theoretical interpretation of the ownership redirection hypothesis advanced by Oxenfeldt and Kelly (Oxenfeldt and Kelly 1968). In a nutshell, couched in resource dependence theory, the ownership redirection hypothesis argues that successful franchise systems will eventually become corporate owned systems because of the reacquisition of franchisee units by the more powerful, and resource-flush franchisors. We argue that the structure and dynamics of ownership patterns in franchising networks depends on the contractibility of the franchisor's system-specific assets and the contractibility of the franchisee's local market assets. Under the property rights view, ownership redirection will result from an increase in the contractibility of the franchisee's local market assets (local market information, financial resources and managerial capabilities) and the resultant increase of the franchisor's bargaining power during the contract period. We extend the franchise literature by arguing that informational, financial and managerial resource constraints are only relevant for the change of ownership structure if they are non-contractible. This hypothesis is evaluated using data collected from the Austrian franchise sector. The empirical results are largely supportive of the hypothesis.