The Dynamics of Growth in Franchising

Abstract

A franchise company is a hybrid or plural form, typically established by both company-owned units and franchised units, where the latter receive an entire business format. We explore the reasons that explain franchise chain growth and how franchising firms choose the extent of company ownership. We build a dynamic model including contractual and system variables such as fees, royalties, investment, chain size, or trade name recognition. By means of this model, we go on to analyze the dynamic behavior of a chain and how its ownership structure evolves over time as a result of the interaction of the variables mentioned above. Using theories from strategic management and agency models, it is argued that franchise chains pursue a balanced growth that lead to superior performance.