Control techniques and upward flow of information in franchising in distant markets: conceptualization and preliminary evidence

Abstract Information exchange between franchisees and franchisors is viewed as instrumental for the attainment of both firm-specific and systemic goals within franchise systems. Our study investigates the issue of control and control techniques employed by franchisors to monitor the performance of their franchisees in distant markers with special focus on the role of information exchange. A major assumption underlies our work. Even though, in the language of agency theory, franchise contracts attempt to align the incentives of the principal (i.e., franchisor) and the agent (i.e., franchisee), such alignment is not easy to achieve due to basic conflicts in the parties' respective goals. For instance, while franchisees are primarily interested in achieving short-term profits, franchisors are more concerned about strengthening the brand equity of their systems. A perfect upward flow of information (i.e., from franchisees to franchisors), therefore, is not necessarily guaranteed. This paper introduces and empirically evaluates four hypotheses relating franchisees' willingness to provide information to their respective franchisors. First, it is suggested that franchisees' willingness to provide information to their franchisors will be positively related to the incidence of repeat purchases since incentives to free-ride are expected to be low at such units in repeat customer industries; hence, franchisees will have little incentive to hide information. Second, it is argued that the greater the age of relationship between the focal franchisee and franchisor, the more secure both parties are likely to feel about the projection of this relationship into the future; consequently, a positive relationship between the age of the franchise relationship and franchisees' willingness to provide information to franchisors is proposed. Next, we suggest that the level of competition faced by franchisees is positively related to franchisees' willingness to provide information to their franchisors. The latter effect is expected for two reasons. Foremost, such franchisees are likely to see the availability of authentic market information as a necessary tool for their franchisors if franchisors are to provide them with accurate, localized advice for combating competitive forces. Second, from an agency theory perspective, franchisees have an incentive to conceal information about the external environmental factors only if such information serves to explain franchisees' business success in terms of forces other than their effort. This would not occur in a competitive environment setting. Finally, multi-unit franchisees are hypothesized to more willingly provide information to their franchisors than their single-unit counterparts given their lower incentives to free-ride and the higher level of security felt in their relationships with their franchisors. The empirical verification of our contentions was carried out in two stages. First, we studied in-depth, the case of Lebanon, to develop the initial descriptive materials. Second, and based on the first step, we surveyed U.S. based franchisors with franchisees in the Middle East and Africa to assess our hypotheses. Results show that while the extent of competition faced by franchisees was found to be an incentive to provide information to franchisors, the age of the relationship emerged as a disincentive to sharing information with the franchisors.