Franchising

hisingAllocation of decision rights in international franchise firms: The case of master and direct franchising

Nada Mumdžiev PhD candidate Center for Business Studies University of Vienna Bruenner Str. 72 A-1210 Vienna, Austria nada.zizic@gmail.com

September, 2009

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Abstract

This paper investigates the allocation of decision rights in master and direct/multi-unit franchising by applying the frameworks of property rights, agency and transaction cost theory. The right to make decisions actually implies control over firm’s operations which is a very important issue in international franchising. In international setting the control over the partner's action becomes increasignly difficult and certain decision rights must be allocated to foreign franchisees. It is therefore essential for the success of franchise systems that franchisors choose the appropriate portion of decision rights to be delegated, which will result in maximizing economic gain but simultaneously enable optimal control over the network. We use the framework of property rights theory because it involves residual decision rights and intangible knowledge assets, which have significant importance in international franchising. This theory assumes that residual decision rights should be delegated to the party which intangible knowledge assets generate the network surplus. Agency theory was already extensively applied for examining franchising issues. This stems from the fact that the relationship between franchisor and franchisee can be seen as an agency relationship. We use it to examine how monitoring costs and agency problems influence the allocation of decision rights. Finally allocation of decision rights can also be determined by the firm's efforts to reduce risk-asssociated transaction costs. We direct our attention to two determinants based on the transaction costs view – environmental and behavioral uncertainty. Previous literature did not examine the difference in allocation of...