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International Franchising: Evidence from US and Canadian Franchisors in Mexico

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  • Francine Lafontaine
  • Joanne Oxley

Abstract

The contracting practices of franchisors outside of theirdomestic markets have received limited attention in the empirical literature on franchising, mostly due to data limitations. We exploit a newly assembled data set that allows us not only to describe the contracting practices of US and Canadian franchisors in Mexico but, most importantly, to compare them to their domestic counterparts. We briefly but systematically review the two theoretical frameworks that have been used most to study franchisors' domestic and international operations, namely agency and internationalization theory, and use implications derived from these to guide our analyses. We focus in turn on franchisors' decision to operate in the Mexican market, their propensity to enter via company-owned versus franchised units as compared to the same decision domestically, and finally the financial contract terms they adopt (royalty rate, franchise fee and advertising fee) for their franchise agreements in Mexico compared to their home market. Our empirical results confirm hypotheses derived from the theories, particularly with respect to the decision to operate in Mexico. But we also find some surprises - for example, the vast majority of US and Canadian franchisors employ exactly the same financial contract terms in Mexico as in their home market. We argue that this tendency is probably best explained by the same arguments used in the franchising literature to explain contract uniformity within domestic markets. Further implications for future research and practice are also discussed.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8179.

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Date of creation: Mar 2001
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Publication status: published as Francine Lafontaine & Joanne E. Oxley, 2004. "International Franchising Practices in Mexico: Do Franchisors Customize Their Contracts?," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 13(1), pages 95-123, 03.
Handle: RePEc:nbr:nberwo:8179

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  1. Mathewson, G Frank & Winter, Ralph A, 1985. "The Economics of Franchise Contracts," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 28(3), pages 503-26, October.
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  3. Arnold K Weinstein, 1977. "Foreign Investments by Service Firms: The Case of Multinational Advertising Agencies," Journal of International Business Studies, Palgrave Macmillan, vol. 8(1), pages 83-91, March.
  4. Shane, Scott A., 1996. "Why franchise companies expand overseas," Journal of Business Venturing, Elsevier, vol. 11(2), pages 73-88, March.
  5. Michael, Steven C., 1996. "To franchise or not to franchise: An analysis of decision rights and organizational form shares," Journal of Business Venturing, Elsevier, vol. 11(1), pages 57-71, January.
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  8. Sugato Bhattacharyya & Francine Lafontaine, 1995. "Double-Sided Moral Hazard and the Nature of Share Contracts," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 761-781, Winter.
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  12. Lyons, Bruce R, 1996. "Empirical Relevance of Efficient Contract Theory: Inter-firm Contracts," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 12(4), pages 27-52, Winter.
  13. Donald W Hackett, 1976. "The International Expansion of U.S. Franchise Systems: Status and Strategies," Journal of International Business Studies, Palgrave Macmillan, vol. 7(1), pages 65-76, March.
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  15. Farok J Contractor & Sumit K Kundu, 1998. "Modal Choice in a World of Alliances: Analyzing Organizational Forms in the International Hotel Sector," Journal of International Business Studies, Palgrave Macmillan, vol. 29(2), pages 325-356, June.
  16. Lafontaine, Francine & Slade, Margaret E, 1997. "Retail Contracting: Theory and Practice," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 45(1), pages 1-25, March.
  17. Brickley, James A. & Dark, Frederick H., 1987. "The choice of organizational form The case of franchising," Journal of Financial Economics, Elsevier, Elsevier, vol. 18(2), pages 401-420, June.
  18. Fladmoe-Lindquist, Karin, 1996. "International franchising: Capabilities and development," Journal of Business Venturing, Elsevier, vol. 11(5), pages 419-438, September.
  19. Gallini, Nancy T & Lutz, Nancy A, 1992. "Dual Distribution and Royalty Fees in Franchising," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 8(3), pages 471-501, October.
  20. Francine Lafontaine, 1992. "Agency Theory and Franchising: Some Empirical Results," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 263-283, Summer.
  21. Karin Fladmoe-Lindquist & Laurent L. Jacque, 1995. "Control Modes in International Service Operations: The Propensity to Franchise," Management Science, INFORMS, INFORMS, vol. 41(7), pages 1238-1249, July.
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