Ownership and Control in Networks: The Case of Franchising

The efficiency of firms and networks depends on the allocation of ownership and control (Fama and Jensen 1983). The aim of the project is to explain the relationship between ownership and control in franchising networks by applying property rights theory and transaction cost theory. According to the property rights theory, contractibility (intangibility) of assets determines the allocation of decision and ownership rights (as residual rights of control) between the network partners. If the franchisors intangible assets are very important to generate the residual income of the network relative to the franchisees intangible local market assets, the franchisor should have a high fraction of residual rights. According to the transaction cost theory, uncertainty impacts the allocation of ownership and control. Franchisors tend to choose less vertical integration and hence transfer more decision and ownership rights to the network partners when the local market uncertainty is high. Furthermore, based on data from the franchising sector in Austria, Germany and Switzerland we provide the first test of the complementarity and substitutability view on the relationship between ownership and decision rights in franchising networks. Overall, this study provides a theoretical and empirical contribution to the corporate governance and franchise literature. We present the first study on ownership and control in franchising network by developing an integrative model using property rights and transaction cost theory. The results of this research are also important for the explanation of the governance structure of other interfirm networks, such as strategic alliances, joint ventures and cooperatives. 1

Franchise networks are characterized by a dual ownership structure as a mix of company-owned and franchised outlets. The relations between the franchisor and the managers of company-owned outlets are regulated by employment contracts with performance-based incentives, while the relations between the franchisor and franchisees are regulated by contracts, which assign decision and residual income rights. The franchisor-franchisee contractual agreements, which contain specific and residual control rights, are the subject of this investigation. Specific rights stipulate the franchisors and franchisees individual obligations, while residual control rights specify each partners authority to make decisions. The study consists of three separate, but interrelated, aspects of control in franchise contracting: control by formulating specific rights (contractual control), control by formulating residual rights (authoritative or decision control), and control by assigning ownership rights (equity control). Based on insights from transaction cost theory and relational reasoning, the study examines the antecedents of vertical restraints as a bundle of contractual clauses in franchise networks. The next study applies transaction cost theory and resource-based theory to investigate the impact of authoritative control as a mechanism for transaction cost saving and value-creation in franchisors performance. Finally, the work investigates the antecedents of equity and non-equity control modes in international franchising from the perspective of transaction cost theory, resource-based theory and culture theory. The empirical results based on data collected from a number of European countries and the United States support the majority of the research hypotheses providing important contributions to theory and practice.