Franchising, liquidity constraints and entry

Abstract

The short- and long-run incentives to franchise are considered. While monitoring problems due to geographic dispersion ensure that franchising is an efficient organizational form in the long run, entry costs suggest that franchising is an efficient solution to the formidable problems posed by entry in the short run. This explains the intensive use of franchising in the early growth stages, followed by a greater proportion of company-owned outlets as the system matures.