How firm strategies impact size of partner-based retail networks: evidence from franchising

Abstract

How do firms’ partnering strategies impact the size of their partner-based retail networks? We draw on agency theory to address this question in the context of franchising. Our econometric analyses (based on nine years of longitudinal balanced panel data) include assessment of data nonstationarity and estimation of a dynamic panel data model that accounts for unobserved heterogeneity and endogeneity. Our findings indicate that franchisee network size is driven more by franchisor strategies that mitigate agency costs than by strategies that simply lower entry and ongoing costs and barriers for franchisees. Valuation Insight: Kacker, Dant, Emerson, Coughlan examine the impact of franchising strategies on franchisor value. They argue that imposing high fees and imposing rigorous qualification standards may reduce the pool of franchisees but will add value by yielding higher quality franchisees who are in a better position to contribute to brand equity and system reputation.