International multi-unit franchising: an agency theoretic explanation

Abstract

In spite of its considerable popularity, multi-unit franchising has been considered an anomaly from an agency theory perspective. This paper addresses this anomaly by attempting a comprehensive agency theoretic explanation of international multi-unit franchising. Although past agency theoretic examinations have mostly focused on single-unit franchising, a closer examination of the international context, which is characterized by significant geographic and cultural distance between franchisors and franchisees, suggests that multi-unit franchising may be more appropriate. This paper examines several agency problems inherent in multi-unit franchising. These include: bonding, adverse selection, information flow, shirking, inefficient risk-bearing, free-riding, and quasi-rent appropriation. Consideration of each of these problems using agency theory perspective leads to the suggestion that multi-unit franchising might address agency problems better than single-unit franchising in the international context.