Allocation of decision rights in international franchise firms: The case of master and direct franchising

Abstract

In international franchising the control over franchisees’ actions is becoming increasingly difficult. Franchisors must allocate a certain portion of decision rights to franchisees to enable effective decision making and maximize residual income, while still retaining control over the network. This conceptual paper combines the perspectives of the property rights, agency theory and transaction cost theory to reveal the differences in the allocation of decision rights between master franchising and direct/multi-unit franchising, as well as to understand the franchisors’ choice between these two modes when entering new markets. The property rights theory predicts that the allocation of residual decision rights depends on the impact of intangible knowledge assets on the residual surplus generation. The agency theory hypothesis suggests that the decision rights allocation is influenced by the monitoring costs due to the information asymmetry between the headquarters and the foreign local partners. The analysis involves two determinants of monitoring costs: the geographic and cultural distances of the host markets. Finally, under the transaction costs view, attention is directed towards environmental and behavioral uncertainty, as determinants of the entry mode choice and the allocation of decision rights.