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Organization in New Business Environment: a Franchisor’s View

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  • Matej Lahovnik Edith Bečić Steiner

    (University of Ljubljana, Faculty of Economics, Ljubljana, Slovenia. FranAdria.)

Abstract

This paper investigates the basic risk and incentives relationship in franchising companies. The results of past research reflect volatile influence of risk and incentives. An in-depth analysis of this relationship was conducted using case study approach, including 12 international franchise firms of two types. Our study included retail and service franchising. Findings from this research confirm basic agency theory predictions. The risk-incentives relationship is negatively correlated in retail franchise companies, due to lower royalties in the sector. Service franchise companies do not follow the same concept, due to their adaptability of franchise system to local markets. We believe service franchise systems might be responsible for volatility. However, both types of companies nurture and develop strategies based on experience and intuition. Findings of the research offer important insights in understanding the nature of franchisor’s risk perception, as the basic underlying mechanism to the risk and incentives relationship. JEL Classification: M10, M16

Suggested Citation

  • Matej Lahovnik Edith Bečić Steiner, 2019. "Organization in New Business Environment: a Franchisor’s View," Zagreb International Review of Economics and Business, Faculty of Economics and Business, University of Zagreb, vol. 22(SCI), pages 83-94, March.
    • Handle: RePEc:zag:zirebs:v:22:y:2019:i:sci:p:83-94
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    References listed on IDEAS

    as
    1. Blair,Roger D. & Lafontaine,Francine, 2005. "The Economics of Franchising," Cambridge Books, Cambridge University Press, number 9780521772525.
    2. Renáta Kosová & Francine Lafontaine, 2010. "Survival And Growth In Retail And Service Industries: Evidence From Franchised Chains," Journal of Industrial Economics, Wiley Blackwell, vol. 58(3), pages 542-578, September.
    3. Wimmer, Bradley S & Garen, John E, 1997. "Moral Hazard, Asset Specificity, Implicit Bonding, and Compensation: The Case of Franchising," Economic Inquiry, Western Economic Association International, vol. 35(3), pages 544-554, July.
    4. Maruyama, Masayoshi & Yamashita, Yu, 2010. "The logic of franchise contracts: Empirical results of Japan," Japan and the World Economy, Elsevier, vol. 22(3), pages 183-192, August.
    5. Blair,Roger D. & Lafontaine,Francine, 2011. "The Economics of Franchising," Cambridge Books, Cambridge University Press, number 9780521775892.
    6. Francine Lafontaine & Margaret Slade, 2007. "Vertical Integration and Firm Boundaries: The Evidence," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 629-685, September.
    7. Canice Prendergast, 2002. "The Tenuous Trade-off between Risk and Incentives," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1071-1102, October.
    8. Luis Vázquez, 2005. "Up-front Franchise Fees and Ongoing Variable Payments as Substitutes: An Agency Perspective," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 26(4), pages 445-460, June.
    9. Masayoshi Maruyama & Yu Yamashita, 2012. "Franchise Fees and Royalties: Theory and Empirical Results," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 40(3), pages 167-189, May.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    franchising; risk; royalties; incentives;
    All these keywords.

    JEL classification:

    • M10 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - General
    • M16 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - International Business Administration

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