Abstract

Franchising offers an important avenue for growth for some entrepreneurs and access to entrepreneurial business opportunities for others (Shane & Hoy, 1996). Franchising occurs when an entrepreneur (the franchisor) develops a branded product, process, or service and sells the right to use the brand, operating routines, and product specifications to another entrepreneur (the franchisee). Because the decision to franchise involves surrendering notable control over outlets bearing the franchisor’s brand (Bradach, 1997), the question of why entrepreneurs opt for franchising over company-ownership has attracted sizable research attention (Combs, Michael, & Castrogiovanni, 2004). Previous research has relied on agency theory to explain which outlets an entrepreneur will franchise, but the theory does not explain two key phenomena: 1) allowing franchisees to own multiple outlets and 2) the use of franchised and company-owned outlets in the same geographic area, called dual distribution. We extend agency theory to explain these phenomena by incorporating insights from research depicting the two types of entrepreneurs, franchisors and franchisees, in a symbiotic relationship (e.g., Bradach, 1997; Kaufman & Eroglu, 1998).

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