Determinants, transactional alignment, and performance outcomes of franchise contract length

Abstract

Purpose The purpose of this paper is to explore the determinants, transactional alignment and performance outcomes of franchise contract length using transaction costs theory (TCT) and resource-based theory (RBT). Design/methodology/approach The author hypothesizes that franchisors choose contract length according to TCT and RBT arguments. TCT explains the safeguarding function of contracts: the franchisors will offer longer contracts when franchisees’ specific investments are high and environmental uncertainty is low. RBT highlights the knowledge leverage function of contracts: the franchisors will offer longer contracts when the brand name and intangible knowledge assets are high. Franchise companies that design contract length aligned with transactional attributes will perform better. The author tests the misalignment hypothesis and comparative performance of franchise contracts by estimating two-stage least squares regression and Heckman two-stage procedure that control for endogeneity and self-selection. Findings Empirical data from the German franchise sector support the hypotheses. In addition to the safeguarding function, franchise contracts have an important knowledge leverage function. Longer contracts perform better due to the development of relational strategic assets and stronger commitment. Research limitations/implications Franchisors must offer longer contracts when specific investments of franchisees, brand name, intangible knowledge assets are high, and environmental uncertainty is low. Franchisors should invest in the development of relational strategic assets and offer longer contracts for the benefit of superior performance. Originality/value The study addresses the significant question of transactional alignment and comparative performance of franchise contracts. It empirically confirms the importance of RBT in explaining contractual choices and performance.

Knowledge management and fashion retail performance: the moderating role of product complexity

“…The RBV is a theoretical perspective accepted widely in retail management and used in research on various aspects, including product knowledge (McGuinness and Hutchinson, 2013), franchise effectiveness (Gorovaia, 2019), omnichannel retail resources and capabilities (Mrutzek-Hartmann et al, 2022), and retail performance (Kim et al, 2022). RBV asserts that a firm's competitive advantage lies in its unique resources, which are valuable, inimitable and non-substitutable (Barney, 1991).…”

It takes two to tango: A taxonomy of franchise success determinants

“…Also, the optimal proportion between company-owned and franchised units has been shown as sector dependent (Barth elemy, 2008;Srinivasan, 2006;Yin and Zajac, 2004) but no research has studied how the industry determine the level of plurality within a system. IJRDM 51,6 5.10 Strategic variables Combs et al (2004) identified three strategic groups among franchise chains based on their managerial expertise, capital scarcity, monitoring costs/local market knowledge needs, agency cots and expansion (Gorovaia, 2019;Peris-Ortiz et al, 2012;Piot-Lepetit et al, 2014). They observed that chains which are influenced to franchise due to resource-scarcity perform worse than those that choose the ratio of franchised units based on monitoring cost considerations.…”

“…Combs et al. (2004) identified three strategic groups among franchise chains based on their managerial expertise, capital scarcity, monitoring costs/local market knowledge needs, agency cots and expansion (Gorovaia, 2019; Peris-Ortiz et al. , 2012; Piot-Lepetit et al.…”

What Drives Royalty Rates in International Franchising?

“…In other words, this contract characteristic reflects the time scope for which the franchisor and franchisee commit to their relationship (even though premature contract terminations and contract extensions are possible; Lafontaine and Shaw 1999). Previous research on the role of contract duration in franchising partnerships suggests that a longer contract duration enhances performance in terms of growth and profitability through lowered coordination and control costs (Gorovaia 2019). In addition to lower transaction costs, long-lasting contracts promote commitment and interorganizational learning, enabling both parties to develop relational strategic assets and leverage knowledge more efficiently (Gorovaia and Windsperger 2018).…”