Effects of contract and trust on franchisor performance

Abstract

The franchisor-franchisee relationship is governed by contracts and trust. This paper analyzes how
\nformal (contracts) and relational (trust) governance mechanisms affected franchisor performance
\nin a service sector franchise for the period 2008¬2015. Using the SOM method in the empirical
\nanalysis, the results revealed that trust-based governance was more prominent than contractbased
\ngovernance in the multi-unit franchise network and the cross-franchising network, negatively
\naffecting franchisor performance in the multi-unit franchise network and positively affecting
\nfranchisor performance in the cross-franchising network. In contrast, contracts were more prominent
\nthan trust in single-unit franchising, negatively affecting franchisor performance. The primary
\npractical implication is that the franchisor should prevent franchisees in the MUF network from
\nopening new outlets in the same city and competing for the existing outlet’s customers.