Franchisee-Franchisor Relationship Quality and Its Impact on Restaurants' Operational and Financial Performance: An Application of Leader-Member Exchange Theory

Abstract

Franchising has evolved as one of the most prevalent business expansion strategies. Essentially, the success of this strategy depends on the dynamic and collaborative relationship between the contracting parties (Franchisor and Franchisee). A franchising relationship is unique and more complicated than conventional business relationships because it is not only a contractual relationship but is also a systematic engagement and partnership. Hence, there is imperative to identify the factors that shape and influence such a relationship. Drawing on the theory of the Leader-Member Exchange (LMX), this study employed an integrated approach to identify the main factors affecting the franchisee-franchisor relationship quality and the extent of their impact on the operational and financial performance of franchise restaurants in Egypt. The integrated model was examined based on data from (50) local and international franchise restaurants in Egypt. The findings indicated that mutual trust, commitment, and franchisor support are essential determinants of the franchisee-franchisor relationship quality. Though the three dimensions had varying degrees of impact, trust and support had the strongest effect. Moreover, the results implied that the mutual relationship between franchisors and franchisees has a direct positive impact on the operational and competitive performance while having an indirect influence on the overall performance of the restaurants. The findings intimate significant theoretical and practical implications.