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Overestimation and Venture Survival: An Empirical Analysis of Development Commitments in International Master Franchising Ventures

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  • Arturs Kalnins

Abstract

Many international master franchising contracts include “development commitments,” clauses specifying a number of units that master franchisees must develop in exchange for exclusive rights to an assigned market, typically their entire home nation. I analyze 142 contracts with development commitments signed by US fast food franchisors and their master franchisees. Several empirical regularities emerge from the analysis: First, the development commitments are large and rarely completely fulfilled. Second, a robust negative relationship exists between survival and development commitment size. Further, ventures with larger commitments exhibit a lower level of investment still productive at the end of the development period. Various explanations for these regularities are considered.

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  • Arturs Kalnins, 2005. "Overestimation and Venture Survival: An Empirical Analysis of Development Commitments in International Master Franchising Ventures," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(4), pages 933-953, December.
    • Handle: RePEc:bla:jemstr:v:14:y:2005:i:4:p:933-953
    DOI: 10.1111/j.1530-9134.2005.00088.x
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    Cited by:

    1. Esther Calderon-Monge & Ivan Pastor-Sanz & Pilar Huerta-Zavala, 2017. "Economic Sustainability in Franchising: A Model to Predict Franchisor Success or Failure," Sustainability, MDPI, vol. 9(8), pages 1-16, August.
    2. Francisco Puig & Miguel González-Loureiro & Pervez N. Ghauri, 2014. "Internationalisation for Survival: The Case of New Ventures," Management International Review, Springer, vol. 54(5), pages 653-673, October.
    3. Jell-Ojobor, Maria & Windsperger, Josef, 2014. "The Choice of Governance Modes of International Franchise Firms — Development of an Integrative Model," Journal of International Management, Elsevier, vol. 20(2), pages 153-187.
    4. Lanchimba, Cintya & Welsh, Dianne H.B. & Fadairo, Muriel & Silva, Vivian-Lara D.S., 2021. "The impact of franchisor signaling on entrepreneurship in emerging markets," Journal of Business Research, Elsevier, vol. 131(C), pages 337-348.
    5. Evan M. Herrnstadt & Ryan Kellogg & Eric Lewis, 2020. "The Economics of Time-Limited Development Options: The Case of Oil and Gas Leases," NBER Working Papers 27165, National Bureau of Economic Research, Inc.
    6. Rosado-Serrano, Alexander & Paul, Justin & Dikova, Desislava, 2018. "International franchising: A literature review and research agenda," Journal of Business Research, Elsevier, vol. 85(C), pages 238-257.
    7. Jell-Ojobor, Maria & Alon, Ilan & Windsperger, Josef, 2022. "The choice of master international franchising – A modified transaction cost model," International Business Review, Elsevier, vol. 31(2).
    8. Arturs Kalnins & Anand Swaminathan & Will Mitchell, 2006. "Turnover Events, Vicarious Information, and the Reduced Likelihood of Outlet-Level Exit Among Small Multiunit Organizations," Organization Science, INFORMS, vol. 17(1), pages 118-131, February.

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