Innovativeness as an Unintended Outcome of Franchising: Insights from Restaurant Chains

Abstract

ABSTRACTA growing trend in improving innovation outcomes is to go outside the firm's boundaries. One mechanism by which firms extend organizational boundaries is through franchising their channels. Yet, the effects of franchising on innovation outcomes have been overlooked in the literature. We propose that a firm's emphasis on franchising will affect its organizational innovativeness, conceptualized as product and process innovativeness, independently and with other firm characteristics—franchising experience, firm size, financial leverage, and slack resources. We find support for our hypotheses using a nonlinear seemingly unrelated regression model estimated using panel data from 38 U.S. restaurant chains between 1992 and 2005. The positive effect of the emphasis on franchising on product innovativeness is stronger for firms with high financial leverage, but weaker for firms with high slack resources. For process innovativeness, the effect is stronger for firms with high financial leverage but weaker for large firms, and for firms with high franchising experience and high slack resources. The findings indicate that a firm's emphasis on franchising has contingent effects on product and process innovation outcomes. Thus, franchising emerges as a competing mechanism (to alliances and joint ventures) that extends organizational boundaries and affects organizational innovativeness.