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The Effects of New Franchisor Partnering Strategies on Franchise System Size

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  • Scott Shane

    () (Weatherhead School of Management, Case Western Reserve University, 11119 Bellflower Road, Cleveland, Ohio 44106)

  • Venkatesh Shankar

    () (Mays Business School, Texas A& M University, College Station, Texas 77843)

  • Ashwin Aravindakshan

    () (Robert H. Smith School of Business, University of Maryland, College Park, Maryland 20742)

Abstract

Many young firms use strategic actions to attract partners who help them increase the size of their operations quickly. This article examines the use of strategic actions to attract partners and increase system size in the context of franchising. We build on research in entrepreneurship, marketing, organization theory, strategic management, and finance to develop specific hypotheses about the influences of franchisor pricing policy and strategic control decisions on system size. We test these hypotheses empirically, using panel data on a sample of 1,292 business format franchise systems from 152 industries that were established in the United States between 1979 and 1996 and followed from their inception forward in time. Our model accounts for the endogeneity of strategic decisions, controls for unobserved firm and industry factors, and accounts for selection effects due to system failure. The results show that franchisors that grow larger (1) lower royalty rates as the systems age, (2) have low up-front franchise fees that rise over time, (3) own a small proportion of outlets and lower that percentage over time, (4) keep franchisees' initial investment low, and (5) finance their franchisees.

Suggested Citation

  • Scott Shane & Venkatesh Shankar & Ashwin Aravindakshan, 2006. "The Effects of New Franchisor Partnering Strategies on Franchise System Size," Management Science, INFORMS, vol. 52(5), pages 773-787, May.
  • Handle: RePEc:inm:ormnsc:v:52:y:2006:i:5:p:773-787
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    File URL: http://dx.doi.org/10.1287/mnsc.1050.0449
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Kartik Kalaignanam & Venkatesh Shankar & Rajan Varadarajan, 2007. "Asymmetric New Product Development Alliances: Win-Win or Win-Lose Partnerships?," Management Science, INFORMS, pages 357-374.
    2. repec:kap:ejlwec:v:44:y:2017:i:3:d:10.1007_s10657-015-9497-9 is not listed on IDEAS
    3. repec:gam:jsusta:v:10:y:2018:i:2:p:347-:d:129262 is not listed on IDEAS
    4. repec:kap:sbusec:v:50:y:2018:i:1:d:10.1007_s11187-017-9885-3 is not listed on IDEAS
    5. Per Davidsson & Johan Wiklund, 2009. "Scott A. Shane: winner of the Global Award for Entrepreneurship Research," Small Business Economics, Springer, vol. 33(2), pages 131-140, August.
    6. Melo, Pedro Lucas de Resende & Borini, Felipe Mendes & Oliveira Junior, Moacir de Miranda & Parente, Ronaldo Couto, 2015. "Internacionalização das redes de franquias brasileiras: um estudo comparativo," RAE - Revista de Administração de Empresas, FGV-EAESP Escola de Administração de Empresas de São Paulo (Brazil), vol. 55(3), May.
    7. 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.
    8. Francesco Baldi, 2016. "Multi-unit franchising strategies: a real options logic," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 43(2), pages 175-217, June.

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