IDEAS home Printed from https://ideas.repec.org/a/kap/ejlwec/v50y2020i2d10.1007_s10657-020-09665-3.html
   My bibliography  Save this article

Real options in franchise contracting: an application of transaction cost and real options theory

Author

Listed:
  • Ilir Hajdini

    (University of Vienna)

  • Josef Windsperger

    (University of Vienna)

Abstract

Previous research has not explained the use of real option clause in franchise contracting. The real option clause has two economic functions: To reduce transaction costs by mitigating opportunism risk and to increase strategic rents by exploiting the profit potential from future upside opportunities under uncertainty. We argue that franchisors will more likely use a real option clause (ROC) in franchise contracts under high behavioral uncertainty, high franchisors’ transaction-specific investments relative to franchisees’ and long contract duration. In addition, by combining transaction cost theory and real option theory, our study provides a new explanation for the impact of environmental uncertainty on the use of ROC in franchise networks by showing that there exists a U-shaped relationship between environmental uncertainty and the franchisor’s use of ROC. Overall, the data from German and Swiss franchise systems provide support of the research model.

Suggested Citation

  • Ilir Hajdini & Josef Windsperger, 2020. "Real options in franchise contracting: an application of transaction cost and real options theory," European Journal of Law and Economics, Springer, vol. 50(2), pages 313-337, October.
    • Handle: RePEc:kap:ejlwec:v:50:y:2020:i:2:d:10.1007_s10657-020-09665-3
    DOI: 10.1007/s10657-020-09665-3
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10657-020-09665-3
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s10657-020-09665-3?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Jarrow, Robert A. & Turnbull, Stuart M., 2000. "The intersection of market and credit risk," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 271-299, January.
    2. Ranjay Gulati & Paul R. Lawrence & Phanish Puranam, 2005. "Adaptation in vertical relationships: beyond incentive conflict," Strategic Management Journal, Wiley Blackwell, vol. 26(5), pages 415-440, May.
    3. Williamson, Oliver E, 1979. "Transaction-Cost Economics: The Governance of Contractural Relations," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 233-261, October.
    4. Klein, Benjamin, 1980. "Transaction Cost Determinants of "Unfair" Contractual Arrangements," American Economic Review, American Economic Association, vol. 70(2), pages 356-362, May.
    5. Williamson, Oliver E, 1973. "Markets and Hierarchies: Some Elementary Considerations," American Economic Review, American Economic Association, vol. 63(2), pages 316-325, May.
    6. Gallini, Nancy T & Lutz, Nancy A, 1992. "Dual Distribution and Royalty Fees in Franchising," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 8(3), pages 471-501, October.
    7. Blair,Roger D. & Lafontaine,Francine, 2011. "The Economics of Franchising," Cambridge Books, Cambridge University Press, number 9780521775892, January.
    8. Ron Sanchez, 2003. "Integrating transaction costs theory and real options theory," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 24(4), pages 267-282.
    9. Keith D. Brouthers & Lance Eliot Brouthers & Steve Werner, 2008. "Real Options, International Entry Mode Choice and Performance," Journal of Management Studies, Wiley Blackwell, vol. 45(5), pages 936-960, July.
    10. Bruce Kogut, 1991. "Joint Ventures and the Option to Expand and Acquire," Management Science, INFORMS, vol. 37(1), pages 19-33, January.
    11. Estrada, Isabel & de la Fuente, Gabriel & Martín-Cruz, Natalia, 2010. "Technological joint venture formation under the real options approach," Research Policy, Elsevier, vol. 39(9), pages 1185-1197, November.
    12. Ilir Hajdini & Aveed Raha, 2018. "Determinants of contractual restraints in franchise contracting," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 39(7), pages 781-791, October.
    13. Gatignon, Hubert & Anderson, Erin, 1988. "The Multinational Corporation's Degree of Control over Foreign Subsidiaries: An Empirical Test of a Transaction Cost Explanation," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 4(2), pages 305-336, Fall.
    14. Arvids A. Ziedonis, 2007. "Real Options in Technology Licensing," Management Science, INFORMS, vol. 53(10), pages 1618-1633, October.
    15. Tailan Chi & Donald J McGuire, 1996. "Collaborative Ventures and Value of Learning: Integrating the Transaction Cost and Strategic Option Perspectives on the Choice of Market Entry Modes," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 27(2), pages 285-307, June.
    16. Rodolphe Durand & Robert M. Grant & Tammy L. Madsen & Lenos Trigeorgis & Jeffrey J. Reuer, 2017. "Real options theory in strategic management," Strategic Management Journal, Wiley Blackwell, vol. 38(1), pages 42-63, January.
    17. Jeffrey J. Reuer & Africa Ariño, 2007. "Strategic alliance contracts: dimensions and determinants of contractual complexity," Strategic Management Journal, Wiley Blackwell, vol. 28(3), pages 313-330, March.
    18. Griessmair, Michele & Hussain, Dildar & Windsperger, Josef, 2014. "Trust and the tendency towards multi-unit franchising: A relational governance view," Journal of Business Research, Elsevier, vol. 67(11), pages 2337-2345.
    19. Armstrong, J. Scott & Overton, Terry S., 1977. "Estimating Nonresponse Bias in Mail Surveys," MPRA Paper 81694, University Library of Munich, Germany.
    20. Patrick Hippmann & Josef Windsperger, 2013. "Formal and Real Authority in Interorganizational Networks: The Case of Joint Ventures," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 34(3-5), pages 319-327, April.
    21. Liang, Hueimei & Lee, Kuo-Jung & Huang, Jen-Tsung & Lei, Hsien-Wei, 2013. "The optimal decisions in franchising under profit uncertainty," Economic Modelling, Elsevier, vol. 31(C), pages 128-137.
    22. Dnes, Antony W, 1993. "A Case-Study Analysis of Franchise Contracts," The Journal of Legal Studies, University of Chicago Press, vol. 22(2), pages 367-393, June.
    23. Marshall S Jiang & Preet S Aulakh & Yigang Pan, 2009. "Licensing duration in foreign markets: A real options perspective," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 40(4), pages 559-577, May.
    24. Wooster, Rossitza B. & Blanco, Luisa & Sawyer, W. Charles, 2016. "Equity commitment under uncertainty: A hierarchical model of real option entry mode choices," International Business Review, Elsevier, vol. 25(1), pages 382-394.
    25. Nina Gorovaia & Josef Windsperger, 2013. "Real Options, Intangible Resources and Performance of Franchise Networks," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 34(3-5), pages 183-194, April.
    26. Klein, Benjamin, 1995. "The economics of franchise contracts," Journal of Corporate Finance, Elsevier, vol. 2(1-2), pages 9-37, October.
    27. Marie A. McKendall & John A. Wagner, 1997. "Motive, Opportunity, Choice, and Corporate Illegality," Organization Science, INFORMS, vol. 8(6), pages 624-647, December.
    28. Brickley, James A & Misra, Sanjog & Van Horn, R Lawrence, 2006. "Contract Duration: Evidence from Franchising," Journal of Law and Economics, University of Chicago Press, vol. 49(1), pages 173-196, April.
    29. Hongxin Zhao & Yadong Luo & Taewon Suh, 2004. "Transaction cost determinants and ownership-based entry mode choice: a meta-analytical review," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 35(6), pages 524-544, November.
    30. George Hendrikse & Patrick Hippmann & Josef Windsperger, 2015. "Trust, transaction costs and contractual incompleteness in franchising," Small Business Economics, Springer, vol. 44(4), pages 867-888, April.
    31. Steven C. Michael, 2000. "Investments to create bargaining power: the case of franchising," Strategic Management Journal, Wiley Blackwell, vol. 21(4), pages 497-514, April.
    32. Ilya RP Cuypers & Xavier Martin, 2010. "What makes and what does not make a real option? A study of equity shares in international joint ventures," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 41(1), pages 47-69, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Angela Madan & Mihai-Ioan Roșca & Adrian Apostol, 2022. "A Holistic Concept based on Modern Influential Techniques of Integrated Marketing Communication: A Country Image Model," Journal of Emerging Trends in Marketing and Management, The Bucharest University of Economic Studies, vol. 1(1), pages 71-90, November.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Tailan Chi & Jing Li & Lenos G Trigeorgis & Andrianos E Tsekrekos, 2019. "Real options theory in international business," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 50(4), pages 525-553, June.
    2. Song, Sangcheol, 2022. "Determining investment size and local embeddedness under host market uncertainty and growth rates," International Business Review, Elsevier, vol. 31(2).
    3. Ipsmiller, Edith & Brouthers, Keith D. & Dikova, Desislava, 2021. "Which export channels provide real options to SMEs?," Journal of World Business, Elsevier, vol. 56(6).
    4. Keith D. Brouthers & Lance Eliot Brouthers & Steve Werner, 2008. "Real Options, International Entry Mode Choice and Performance," Journal of Management Studies, Wiley Blackwell, vol. 45(5), pages 936-960, July.
    5. Vanesa Solís-Rodríguez & Manuel González-Díaz, 2019. "Prior interactions and contractual completeness in Spanish franchising," Small Business Economics, Springer, vol. 53(3), pages 795-812, October.
    6. Guo, Shiau-Ling, 2023. "The governance implication of the geographic concentration of franchise activities for franchise relationships," Journal of Business Research, Elsevier, vol. 157(C).
    7. Gorupec Natalia & Tiberius Victor & Brehmer Nataliia & Kraus Sascha, 2022. "Tackling uncertain future scenarios with real options: A review and research framework," The Irish Journal of Management, Sciendo, vol. 41(1), pages 69-88, July.
    8. Michael Nippa & Jeffrey J Reuer, 2019. "On the future of international joint venture research," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 50(4), pages 555-597, June.
    9. George Hendrikse & Patrick Hippmann & Josef Windsperger, 2015. "Trust, transaction costs and contractual incompleteness in franchising," Small Business Economics, Springer, vol. 44(4), pages 867-888, April.
    10. Begoña López-Fernández & Susana López-Bayón, 2018. "Antecedents of early terminations in franchising: franchisor versus franchisee cancelations," Small Business Economics, Springer, vol. 50(4), pages 677-695, April.
    11. Dildar Hussain & Marijana Sreckovic & Josef Windsperger, 2018. "An organizational capability perspective on multi-unit franchising," Small Business Economics, Springer, vol. 50(4), pages 717-727, April.
    12. Cuypers, I.R.P., 2009. "Essays on equity joint ventures, uncertainty and experience," Other publications TiSEM 8dc79e86-c625-467f-a450-8, Tilburg University, School of Economics and Management.
    13. Choi, Jongmoo Jay & Ju, Ming & Trigeorgis, Lenos & Zhang, Xiaotian Tina, 2021. "Outsourcing flexibility under financial constraints," Journal of Corporate Finance, Elsevier, vol. 67(C).
    14. Jonas Puck & Markus K. Hödl & Igor Filatotchev & Hans-Georg Wolff & Benjamin Bader, 2016. "Ownership mode, cultural distance, and the extent of parent firms’ strategic control over subsidiaries in the PRC," Asia Pacific Journal of Management, Springer, vol. 33(4), pages 1075-1105, December.
    15. Jell-Ojobor, Maria & Hajdini, Ilir & Windsperger, Josef, 2022. "Governance of international franchise networks: Combining value creation and value appropriation perspectives," Journal of Business Research, Elsevier, vol. 139(C), pages 267-279.
    16. Griessmair, Michele & Hussain, Dildar & Windsperger, Josef, 2014. "Trust and the tendency towards multi-unit franchising: A relational governance view," Journal of Business Research, Elsevier, vol. 67(11), pages 2337-2345.
    17. Fu-Sheng Tsai & Chin-Chiung Kuo & Julia L. Lin, 2020. "Knowledge Heterogenization of the Franchising Literature Applying Transaction Cost Economics," Economies, MDPI, vol. 8(4), pages 1-27, November.
    18. Sels, A.T.H., 2006. "Foreign direct investment as an entry mode. An application in emerging economies," Other publications TiSEM 583ca9b5-1691-425d-8f77-0, Tilburg University, School of Economics and Management.
    19. Emmanuel Raynaud, 2010. "The Structure of Franchise Contracts," Chapters, in: Peter G. Klein & Michael E. Sykuta (ed.), The Elgar Companion to Transaction Cost Economics, chapter 20, Edward Elgar Publishing.
    20. Francine Lafontaine & Margaret E. Slade, 1998. "Incentive Contracting and the Franchise Decision," NBER Working Papers 6544, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Transaction cost theory; Real options theory; Explicit call options; Franchising;
    All these keywords.

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:ejlwec:v:50:y:2020:i:2:d:10.1007_s10657-020-09665-3. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.