Using Organizational Capability and Transaction Cost Theory to Explain Multi-unit Franchising

Abstract

This study presents a new model of franchisor’s choice of multi-unit franchising (MUF) by combining organizational capability and transaction cost theory. According to the transaction cost theory, high franchisees’ transaction-specific investments and high behavioral uncertainty increase the franchisor’s propensity to use MUF and high environmental uncertainty decreases the propensity to use MUF. Based on the organizational capability view, MUF increases the franchise firm’s capabilities (such as knowledge transfer and monitoring capabilities) and hence its competitive advantage compared to a single-unit franchising system. Specifically, highly intangible system-specific know-how requires high knowledge transfer and monitoring capabilities and therefore increases the franchisor’s propensity to use MUF. The results from the German franchise sector show that the combined application of transaction cost and organizational capability theory of MUF significantly increases the explanatory power of the research model. Overall this study adds to the literature by showing that—complementary to the transaction cost view—organizational capability theory explains MUF as knowledge transfer and exploitation mechanism.