Academic journal article Journal of Managerial Issues

Franchising as a Collective Action Mechanism in Fragmented Industry Structures

Academic journal article Journal of Managerial Issues

Franchising as a Collective Action Mechanism in Fragmented Industry Structures

Article excerpt

Why do firms utilize business franchising as an explicit strategy? A number of scholars have attempted to answer this question through different theoretical lenses. The two most common theories to understand the choice to franchise include resource scarcity theory (Oxenfeldt and Kelly, 1969) and agency theory' (Jensen and Meckling, 1976). While aspects of each are meritorious and have led to a greater understanding of the phenomenon of franchising, the central argument in this paper reasons that there also exists external antecedents that induce the internal strategy-making within firms. Namely, these two external, and interconnected, factors include both industry structure and collective action. In other words, the internal choice for a firm to franchise or not may be conditioned by the external environment that the firm operates in.

More specifically, in industries characterized as fragmented, firms may have a higher propensity to engage in franchising in order to gain industry-level power through collective action (Olson, 1965; l'feffer and Salancik, 1978). On the other hand, in markets and industries that are highly concentrated (i.e., oligopolistic), research has surmised that collective action is easier since market participants can eliminate or reduce the free-rider problem more effectively (Olson, 1965). Therefore, it is not clear whether or not there is more incentive to collectively act in fragmented or consolidated markets. This paper seeks evidence to the following question: Does industry structure lead to collective behavior? More specifically, is a higher likelihood of franchising in industries that are more fragmented (as opposed to more oligopolistic) observed?

Research on fragmented industries is sparse as data collection is more complex and problematic than in more defined and concentrated structures. Additionally, the franchising literature, while growing, is still in need of additional theoretical and empirical underpinnings in order to progress to maturity (Combs et at., 2011). The current paper employs industrial organization theory and collective action theory to explain why franchising exists as opposed to other, more individualistic strategies normally employed in these types of atomistic environments (Bollinger, 1990). Empirically, both (1) the probability that firms engage in franchising at differing levels of industry concentration, and if (2) the franchising/company-owned mix is also related to such concentration, are tested.

The gap that this paper addresses lies in the notion that current franchising theory has assumed that the choice to franchise (or not) is internally-induced, as opposed to exogenously determined (Combs et al., 2004; Barthelemy, 2011). Resource scarcity theorists look internally at the firm and model the choice to franchise as endogenous to firm-level capital, be it human or financial capital. Likewise, agency theorists view the firm as a market for opportunism where the problem to solve centers around either monitoring or incentives to induce effort. However, prior to making these decisions, external factors are applying pressure on firms and limiting the discretion of managers when it comes to making these choices. Testing a major external factor on the propensity to franchise is the major contribution of this paper.

The paper proceeds as follows. In the next section, the major theoretical literature streams appropriate to the research questions are introduced. The third section develops the hypotheses to be tested followed by the fourth section that details the data, methods and estimation technique utilized. Finally, the fifth section produces the results and discussion, which also includes shortcomings of the research and future research directions.

LITERATURE

Franchising

Franchising has become an ever-increasing mechanism for firm governance, both in the U.S. and internationally. According to the U. …

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