Vectors of Influence on the Contractual Mix: Geographical Dispersion vs. Automation in Brazilian Franchised Chains
14 Pages Posted: 29 Apr 2010 Last revised: 15 Aug 2010
Date Written: April 21, 2010
Abstract
This paper aims the influence of coordination costs on the proportion of company-owned units in Brazilian franchised chains. This influence was split into two competing vectors: the geographical dispersion of outlets on the one hand and the automation/standardization level of processes in the outlets on the other. Greater geographic dispersion increases monitoring costs, which requires performance incentives mechanisms. This view is convergent to the Agency Theory approach for franchising contracts, which proposes that powerful performance incentives are obtained when the local manager is shifted to residual claimant of the outlet (a franchisee). Reciprocally, automated manufacturing processes can increase the chain capability to monitor (even from a distance) its units, reducing the need for more powerful incentives. These statements are tested in this study. The tests are performed based on information from 191 franchised chains in Brazil listed in the yearbook of the Brazilian Franchising Association (ABF-2007). A cross-sectional analysis was performed, in which the proportion of both company-owned and franchised units (the contractual mix) is faced with proxies related to the monitoring capabilities of the chains. The study’s results support the propositions tested: both vectors act in the expected direction on the contractual mix. These results may be useful both for deciding to expand the chain as well as for choosing distinct technology bundles of production processes.
Keywords: franchising, monitoring costs, automation
JEL Classification: L14, L8, M41
Suggested Citation: Suggested Citation