Determinants, Transactional Alignment, and Performance Outcomes of Franchise Contract Length

Purpose: In this paper, I explore the determinants, transactional alignment and performance outcomes of franchise contract length using transaction costs and resource-based theories. Design/methodology/approach: I hypothesize that franchisors choose contract length according to transaction cost theory (TCT) and resource-based theory (RBT) arguments. TCT explains the safeguarding function of contracts: the franchisors will offer longer contracts when franchisees' specific investments are high and environmental uncertainty is low. RBT highlights the knowledge leverage function of contracts: the franchisors will offer longer contracts when the brand name and intangible knowledge assets are high. Franchise companies that design contract length aligned with transactional attributes will perform better. I test the misalignment hypothesis and comparative performance of franchise contracts by estimating two-stage least-squares regression and Heckman two-stage procedure that control for endogeneity and self-selection. Findings: Empirical data from the German franchise sector support the hypotheses. In addition to the safeguarding function, franchise contracts have an important knowledge leverage function. Longer contracts perform better due to the development of relational strategic assets and stronger commitment. Research limitations/implications: Franchisors must offer longer contracts when specific investments of franchisees, brand name, intangible knowledge assets are high, and environmental uncertainty is low. Franchisors should invest in the development of relational strategic assets and offer longer contracts for the benefit of superior performance. Originality/value: The study addresses the significant question of transactional alignment and comparative performance of franchise contracts. It empirically confirms the importance of resource-based theory in explaining contractual choices and performance