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The economic impact of location on multi-unit franchising

Abstract:

One of the most common forms of franchising is Multi-Unit Franchising (MUF), which is the primary growth vehicle for franchising worldwide. MUF is a governance form inside franchising networks where the franchisor bestows the franchisee the right to own and operate more than one outlet. Many of these franchises are small businesses that face several problems, such as the lack of access to capital for growth. Based on agency theory, we address the impact of geographical dispersion of the franchised units to headquarters, agglomeration of franchise stores, incentive mechanisms and monitoring on the proportion of multi-unit franchising in the chain. Using a unique cross-sectional Brazilian data set, we found a positive relationship between the proportion of MUF and the variables, in agreement with agency theory. Implications for small businesses, franchising and the economy are discussed.