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

Nina Gorovaia (Frederick University, Nicosia, Cyprus)

International Journal of Retail & Distribution Management

ISSN: 0959-0552

Article publication date: 13 November 2018

Issue publication date: 7 August 2019

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.

Keywords

Citation

Gorovaia, N. (2019), "Determinants, transactional alignment, and performance outcomes of franchise contract length", International Journal of Retail & Distribution Management, Vol. 47 No. 7, pp. 714-732. https://doi.org/10.1108/IJRDM-10-2017-0245

Publisher

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Emerald Publishing Limited

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