The governance of franchising networks

Abstract

The aim of the chapter is to provide an overview and comparison of major research results regarding the governance structure of franchising networks based on different theoretical perspectives. In addition, I focus on the contribution the property rights theory can make to the franchise literature. Although franchising has been dealt with extensively in the organisational economics and management literature, the relation between residual decision and ownership rights in franchise firms remains largely unexplored. Most studies have focused on the explanation of the incentive structure (fees, royalties and other contractual restrictions) and the proportion of company- owned outlets (e.g. Rubin 1978; Brickley & Dark 1987; Norton 1988; Lafontaine 1992; Dnes 1992, 1996; Lafontaine & Kaufmann 1994; Bradach 1997; Combs & Ketchen 1999; Dahlstrom & Nygaard 1999; Dant & Kaufmann 2003; Lafontaine & Shaw 1999, 2005; Blair & Lafontaine 2005; Burkle & Posselt 2008; Castrogiovanni et al. 2006a, 2006b; Combs et al. 2009; Barthelemy 2011; Hendrikse & Jiang 2011; Gonzalez- Diaz & SolisRodriguez 2012) without investigating the governance structure of the franchise firm as an institutional entity that consists of two interrelated parts: decision rights and ownership rights, the latter of which includes both residual income rights of franchised outlets and company- owned outlets. The franchisor therefore has to set up an efficient network architecture, consisting of contractual relations between the franchisor and the franchisees and hierarchical relations between the headquarters and the managers of the company- owned outlets. Since ownership rights are diluted in franchising network through the division of residual income stream between the franchisor and franchisees, ownership surrogates are used to simulate the incentive effect of undiluted residual income rights in franchise contracting (Windsperger 2003). For instance, the franchisor’s diluted residual income rights under franchised outlets may be compensated by using the following contractual provisions as ownership surrogates: tying arrangements, resale price maintenance, lease control, exclusive dealing clauses and buy- back arrangements. I start with the description of the governance structure of the franchise firm. Next, I present and compare major research results on ownership and contract structure of franchising networks. Finally, I discuss research strategies for the future.