Franchising contracts as routines: Untangling the adaptive value of incomplete contracts

Scant attention has been paid to the role of franchising contracts in the adaptation of franchise chains in prior franchising studies, which focus predominantly on how they safeguard against franchisee stores’ misbehavior. We conceptualize franchising contracts as a collection of routines, building on the theory of routines. We theorize how discrepancies between what a chain prescribes and how franchisee stores perform their day-to-day operations foster chainwide adaptation. Our model elaborates how—by shaping a chain’s effort to verify franchisee stores’ performance and coordinate with franchisee stores—contractual incompleteness influences chainwide adaptation. We use primary and secondary data from 281 US franchise chains to test these ideas. Our novel theoretical contribution is showing how franchising contracts’ incompleteness influences chainwide adaptation, which in turn propels its revenue growth beyond rival chains.