The governance implication of the geographic concentration of franchise activities for franchise relationships

Abstract

While the interfirm governance literature has drawn largely upon the transaction cost perspective to investigate the determinants of contract design, the governance implications of partners’ geographic proximity have received relatively little attention. By complementing the agency theoretical lens of geographic dispersion with the economic and sociological perspectives on geographic proximity, I investigate how the geographic concentration of partner firms relates to the design of contracts. Leveraging disclosed documents and contracts on restaurant franchise chains in the U.S., I find that a greater geographic concentration of outlets is associated with less use of enforcement provisions. At the same time, the results show that the relationship between the geographic concentration of outlets and the use of coordination provisions hinges upon the intensity of multiunit ownership in franchise chains. This paper generates new insights into the governance implications of proximate partners that offer similar products or services and the antecedents of contract design.