Franchising proportion and network failure
- 503 Downloads
This paper investigates the relationship between franchising proportion of a network and firm failure. Drawing from resource scarcity and agency theories, we show that franchising firms that overfranchise and do not structure their networks in congruence with these two theories have lower survival prospects. We test our arguments with extensive data from nearly 5000 franchising firms listed in Entrepreneur magazine. The findings suggest that franchising proportion has a U-shape relationship with network failure. Additional analysis shows that firm size and geographic scope moderate the relationship between the squared term of franchising proportion and network failure. For franchisors, our results highlight the importance of maintaining an appropriate mix of franchised and firm-owned outlets within a network.
KeywordsFranchise networks Firm failure Agency theory Resource scarcity
JEL classificationC12 L26 L25
- Aiken, L. S., West, S. G., & Reno, R. R. (1991). Multiple regression: Testing and interpreting interactions. Newbury Park: SAGE.Google Scholar
- Alchian, A. A., & Demsetz, H. (1972). Production, information costs, and economic organization. The American Economic Review, 62(5), 777–795.Google Scholar
- Combs, J. G., Michael, S. C., & Castrogiovanni, G. J. (2009). Institutional influences on the choice of organizational form: the case of franchising. Journal of Management. doi: 10.1177/0149206309336883.
- Dobbs, M. E., Boggs, D. J., Grünhagen, M., Palacios, L. L., & Flight, R. L. (2012). Time will tell: interaction effects of franchising percentages and age on franchisor mortality rates. International Entrepreneurship and Management Journal, 10(3), 607–621. doi: 10.1007/s11365-012-0245-0.CrossRefGoogle Scholar
- IHS Economics (2016). Franchise Business Economic Outlook for 2016.Google Scholar
- Hsu, L.-T. (. J.)., & Jang, S. (. S.). (2009). Effects of restaurant franchising: does an optimal franchise proportion exist? International Journal of Hospitality Management, 28(2), 204–211. doi: 10.1016/j.ijhm.2008.07.002.
- Koh, Y., Lee, S., & Boo, S. (2009). Does franchising help restaurant firm value? International Journal of Hospitality Management, 28(2), 289–296. doi: 10.1016/j.ijhm.2008.10.001.
- Lafontaine, F., & Shaw, K. L. (2005). Targeting managerial control: evidence from franchising. The Rand Journal of Economics, 36(1), 131–150.Google Scholar
- Oxenfeldt, A., & Kelly, A. (1968). Will successful franchise systems ultimately become wholly-owned chains? Journal of Retailing, 4, 69–83.Google Scholar
- Pedhazur, E. J. (1997). Multiple Regression in Behavioral Research (3rd ed.). Orlando, FL: Harcourt Brace.Google Scholar
- Penrose, E. (1959). The theory of the growth of the firm. New York: John Wiley and Sons.Google Scholar
- Shane, S. (1998b). Making new franchise systems work. Strategic Management Journal, 19(7), 697–707. doi: 10.1002/(SICI)1097-0266(199807)19:7<697::AID-SMJ972>3.0.CO;2-O.CrossRefGoogle Scholar
- Silverman, B. S., Nickerson, J. A., & Freeman, J. (1997). Profitability, transactional alignment, and organizational mortality in the US trucking industry. Strategic Management Journal, 18(S1), 31–52. doi: 10.1002/(SICI)1097-0266(199707)18:1+<31::AID-SMJ920>3.0.CO;2-S.CrossRefGoogle Scholar
- Srinivasan, R. (2006). Dual distribution and intangible firm value: Franchising in restaurant chains. Journal of Marketing, 70(3), 120–135. doi: 10.1509/jmkg.70.3.120.