The results of the study indicate that franchise systems founded between 1981 and 1983, which are structured to economize on agency costs, are more likely to be alive in 1994 than franchise systems which are not structured to economize on agency costs. This finding is important because the failure rate of franchise systems is high, with over seventy-two percent of the new franchise systems in the sample ceasing to franchise by 1994.
Moreover, the quality of the data and longitudinal design of the study should increase confidence in the findings. The independent variables were measured in 1984 and the dependent variable was measured in 1994, suggesting that the direction of causality runs from the independent variables to the dependent variable.
The results of this study have important implications for research on franchising. While franchising scholars have shown that agency considerations explain the choice to franchise or maintain company ownership of retail outlets, this study overcomes several limitations existing in the agency research on franchising to date. First, agency theorists have focused on a limited number of agency factors in explaining the franchising phenomenon. To the traditional list of agency factors, which include free riding, geographic dispersion, quasi-rent appropriation, royalty rates, and franchise fees, this study adds monitoring efficiency, passive ownership, master franchise agreements, contract length, and complexity of the franchise concept. Therefore, this study extends the comprehensiveness of the agency model of franchising.
Second, most research on franchising through the agency perspective has shown that firms prefer franchising when agency problems make company ownership of outlets problematic. However, the provision of residual claimancy to the owners of retail outlets does not eliminate agency problems. This study shows that once a firm chooses to use a hybrid organizational form, it must economize on agency costs to survive. Therefore, this study shows that agency theory explains not just the choice of franchising, but the survival of franchise systems as well.
Third, most franchising research has been conducted cross-sectionally on samples of surviving franchise systems. Since previous research (e.g., Shane, forthcoming) has shown that franchise systems have high failure rates, one could argue that previous agency theory tests of franchising are unreliable since they suffer from potential survivor bias problems. This study shows that agency considerations affect the survival of new franchise systems, while ruling out potential survivor bias.
The results of this study have important implications for research on hybrid organizational forms. This study expands the linkage between agency theory and firm survival. Although agency theorists have argued that the environment selects for survival firms that economize on agency costs (Fama and Jensen, 1983), few empirical tests of this argument have been undertaken. This study provides support for the argument that proper management of agency costs enhances the probability of firm survival. Such an argument is important because there is little empirical evidence which shows that the environment selects firms on factors other than population dynamics (Aldrich, 1990). By providing an additional explanation for the survival of firms, this study provides a bridge between the perspectives of environmental selection and strategic choice (Child, 1972).
This study also provides empirical support for a relationship between agency theory and the resource-based view of the firm (Mahoney and Pandian, 1992; Castanias and Helfat, 1991). Work by Shane (forthcoming) has shown that firms often use franchising to overcome managerial limits to firm growth. This study showed that the key resources for franchise system survival are ones that allow the firm to economize on agency costs. Future research should consider the linkage between the agency and resource-based perspectives on the survival and growth of hybrid organizational forms. Perhaps the rare, inimitable, and valuable resources (Barney, 1986) that allow for the survival of certain hybrid organizations are superior routines for economizing on agency costs.
This study has shown that new franchisers are more likely to survive if they economize on agency costs in establishing new franchise systems. This contribution is valuable because franchising is an important organizational form in retail distribution today. Moreover, franchising is only one type of hybrid organizational form. It is possible that the survival of hybrid organizational forms in general depends on the ability of firms to economize on agency costs. Hopefully, this study will spur further understanding of how economizing on agency costs enhances the survival of hybrid organizational forms. This investigation would be valuable in a world economy that is increasingly replacing hierarchical organizations with hybrid organizational forms.
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