To Own Or To Franchise?: The International Control Decision For Service Companies

Franchising, which accounts for a significant share of the U.S. domestic service industry, has also become a major strategic alternative in the international expansion of U.S. service firms. This article attempts to explain the international franchising and control decision by U.S.‐based service firms in terms of a theoretical framework that borrows from agency theory and transaction‐cost analysis. Specifically, it attempts to answer the following question: Why would a well‐established service firm choose to operate in certain countries through a franchising agreement whereas in others it would set up a wholly‐owned subsidiary? In their empirical test of a sample of over 10,000 international service units that were either owned or franchised by 12 U.S. multinational service companies, the authors find that the most important determinants of the decision to franchise rather than own are the following four: (1) geographical distance from headquarters; (2) extent of cultural differences; (3) years of international experience; and (4) degree of concern about reputation or brand name. Greater geographic and cultural distance make service companies more likely to franchise, as do greater experience and familiarity with international business settings. Greater concern about brand name, by contrast, makes companies more likely to own than franchise. Measures of political and exchange risk have no detectable effect.