چرا کارآفرینان از فرانچایزینگ به عنوان یک ابزار مالی استفاده می کنند ؟ توضیح نمایندگی

When and why one type of entrepreneur (franchisor) attracts to its ventures another type of entrepreneur (franchisees) instead of passive investors is a central concern in entrepreneurship literature. Based on the informativeness principle of the principal–agent model, we claim that franchisees are not such an expensive financial tool as has been argued in the literature because their compensation (return) is more efficiently designed: it directly depends on variables which are under franchisees' control. We therefore link agency and financial explanations for franchising. Most of our findings show that, once the agency argument is controlled for, the higher the cost of alternative funds for the franchisor (estimated through different variables), the more the franchisor will rely on expansion through franchising as opposed to company-ownership. We interpret this as a clue that franchising is also used as a financial capital source.

Attracting the most competitive resources to the venture is essential for an entrepreneur's success (Ireland et al., 2003 and Michael, 2009). Entrepreneurship literature has analyzed this, focusing mainly on how entrepreneurs signal their private information to reduce capital providers' distrust (i.e. how they obtain funds), in both R&D companies (Deeds et al., 1997, Janney and Folta, 2003 and Janney and Folta, 2006) and franchise chains (Michael, 2009). We develop this research line in franchising but, instead of focusing on how to attract funds (e.g. how to solve asymmetric information problems), we turn to when and why different sources of resources are preferable (e.g. when franchisees' capital becomes more attractive). Franchising has also been extensively analyzed in the entrepreneurship literature, suggesting that it is an entrepreneurial partnership (cooperative arrangement) made up of two different types of entrepreneur: franchisor and franchisees (Baucus et al., 1996 and Kaufmann and Dant, 1999). Given that the new venture is launched by the franchisor, they must then attract resources to their business. Norton (1995) argues that franchisors will choose fund providers according to their costs, with franchisees' capital being just one possible option. However, franchisees, like any entrepreneur, also have a profit motivation (Spinelli and Birley, 1996) and do not participate for free. They will join the venture depending on the rate of return and will expect a risk premium (Phan et al., 1996). The relevant question is therefore when and why entrepreneurs prefer franchisees' funds to passive investors' funds. The resource scarcity argument has offered an initial and controversial answer. It sustains that franchising is used to facilitate access to scarce resources, such as capital ( Ozanne and Hunt, 1971 and Caves and Murphy, 1976)2. Given this emphasis on scarcity, this argument did not initially consider the relative prices of alternative funds so it was highly criticized. On the one hand, Rubin (1978) argues that in terms of risk bearing it is worse to become a franchisee than a shareholder. Furthermore, Norton (1995) maintains that there is no financial capital scarcity because different alternatives for financing startup businesses exist. On the other hand, in addition to the fact than even large market listed companies use franchising, several academic papers sustain that franchising is mainly a mechanism of governance to solve agency problems between the outlet manager and the chain owner ( Caves and Murphy, 1976, Rubin, 1978, Brickley and Dark, 1987, Brickley et al., 1991, Lafontaine, 1992, Scott, 1995, Lafontaine and Shaw, 2005 and Castrogiovanni et al., 2006a). It comes as a surprise, however, that franchisors always emphasize in interviews the provision of financial funds as one of the most relevant reasons for using franchising (Lafontaine, 1992 and Dant, 1995), instead of the agency argument, which is the most widely supported by academics (Combs and Ketchen, 2003). More recently, both arguments have been linked to try to solve this empirical incongruence, claiming that the motivational and selection advantage of franchising might result in less expensive capital for the franchisor (Lafontaine, 1992, Martin and Justis, 1993, Shane, 1996a, Combs and Ketchen, 1999 and Combs et al., 2004). Departing from this idea, the aim of this paper is to test if capital scarcity explains the use of franchising by showing that variations in the prices of alternative sources of capital alter the use of franchising, once the agency argument is controlled for. We use the informativeness principle (Holmstrom, 1979) of principal–agent model to link agency and resource-scarcity arguments and to rationalize the advantage of franchisee capital in terms of the demand for return on capital. The informativeness principle derived from the principal–agent model suggests that agents will demand a higher expected return when their compensation depends on variables that are not directly related to their effort (Holmstrom, 1979). Agents will perceive that their income randomness rises when such variables are present because they have little control over them and, consequently, lose control over their returns. Assuming risk-averse agents, Milgrom and Roberts (1992: 219) show that they will demand a positive risk premium as compensation for this increased income variability. Passive investors, such as lenders or shareholders, will therefore demand a higher return on capital because their compensation will depend on variables that are not directly related to their effort: they have very little influence over decision-making in the outlet and do not have good information about the efforts made by the agents managing the outlets, nor about their abilities (Martin and Justis, 1993, Combs and Ketchen, 1999 and Combs et al., 2004). Additionally, if the franchisor bankrupts, they face the financial risk of not recovering their investment. Conversely, franchisees offer low-cost capital because their compensation depends on variables that are directly related to their effort: they are active investors having the best information about the effort and abilities employed in the business and direct control over how it is run, at least from an operational point of view (Martin and Justis, 1993, Combs and Ketchen, 1999 and Combs et al., 2004). Furthermore, they would still own the physical assets if the franchisor bankrupts because the assets are in an independent firm, legally separate from those of the franchisor. In sum, we argue that the franchisee disadvantage in terms of exogenous risk allocation (Rubin, 1978) may be compensated not only by the motivational and selection advantage of franchising (Combs, Michael and Castrogiovanni, 2004), but also by greater direct control over the investment and, consequently, lower perceived variability. Most of the results show that once agency problems are controlled for, the greater the franchisors' capital costs (estimated through six different variables), the more likely it is to use franchisee capital. Additionally, franchisors with financial partners as shareholders franchise fewer establishments than chains without this type of shareholder. Both findings are therefore consistent with the use of franchising as a financial tool. Apart from this theoretical and empirical contribution on why and when entrepreneurs prefer franchisees as partners in their ventures, the paper also contributes from an empirical perspective by shedding light on the capital scarcity controversy. Most of the studies on the financial capital argument to date are based on large North American companies that are listed on the stock exchange (for example, Combs and Ketchen, 1999 and Combs et al., 2004) because of their financial data availability (Castrogiovanni et al., 2006a is an important exception). But this type of sampling leaves out small and medium enterprises (SMEs), such companies being precisely the ones for which it is most difficult to gain access to resources. Our study includes SMEs, many of them unlisted and having little experience. This enables us to extend the previous empirical studies to the whole business universe. We have also introduced the dynamic nature of the franchised-owned outlet mix (Castrogiovanni et al., 2006a: 30), by applying a partial adjustment model to a panel data set. Given the relatively long-term nature of franchise contracts, franchisors cannot instantly adjust their percentage of franchisees so the adjustment is made year by year in line with the franchisor's objective, depending on their previous results and experiences. The rest of the article is organized as follows. In the second section, we carry out a theoretical review of the reasons for franchising, focusing on the capital scarcity argument. In the third section, we describe the process followed for obtaining data, the sources used and the econometric model adopted. Finally, we state the results and conclusions of the study, in sections four and five respectively.

This study analyses if financial reasons explain the use of franchising by showing that variations in the franchisor's prices of alternative sources of capital alter the use of franchising, once the agency argument is controlled for. We use the informativeness principle (Holmstrom, 1979) of principal–agent model to rationalize the advantage of franchisee capital in terms of risk premium. We claim that using franchising as a financial tool is not as expensive as has been claimed (Rubin, 1978) because the disadvantage in terms of exogenous risk allocation may be compensated by greater direct control over the investment so that the franchisees perceive lower variability. Franchisees have better information about managers' effort and skills and also have more chances of recovering their investment in the case of the franchisor's bankruptcy than shareholders and lenders. We apply a partial adjustment model, borrowed from the financial and capital structure literature, because it fits with the theoretical model and the empirical evolution of the percentage of franchised outlets. The results indicate, first, that if expansion through equity/debt is more expensive (with prices being proxied by the asset backing ratio, the cost of debt and the chain's liquidity), franchising will be used more. However, other capital cost proxy variables are not so consistent across different estimations, so we have to be cautious about this result. Second, if franchisor experience rises and/or the up-front investment decreases, franchising is likely to be used more. Third, franchisors with financial partners as shareholders franchise fewer establishments than chains without this type of shareholder. Finally, we verified the partial adjustment of the ownership structure, obtaining a high adjustment speed (78–69%). This was to be expected because franchisors have good tools (new openings) for reaching the target level of franchising. Entrepreneurs may draw some lessons from these results. First, the results suggest that entrepreneurs become franchisors in order to attract financial resource providers, probably because, by becoming franchisees, fund providers may demand lower return on capital than more conventional providers such as shareholders and lenders. However, the emphasis should be on carrying out a cost-benefit analysis when deciding between franchising and other conventional formulae because franchising is neither good nor bad but depends on relative prices. Highlighting some costs and benefits which are not explicit payments or incomes, particularly for unlisted companies, may help practitioners carry out their analyses and ask for the relevant variables. An example of such benefits is, as the literature had indicated, the best incentive alignment which leads to lower capital cost ( Lafontaine, 1992, Combs and Ketchen, 1999 and Combs et al., 2004). We now add that, in comparison with other passive investors, franchisees have better tools to influence the return on their investments which also leads them to accept a lower return on capital. We also show which variables influence franchising or other funding costs, offering clues to entrepreneurs about how to reduce these costs. For chain expansion, it is important to attract potential franchisees to the business, so it is necessary to act on the variables that make the franchise package attractive. Whatever the potential profit from the outlet, it is important to keep the initial investment as low as possible and to offer guarantees that the business will be successful, for which prior experience and brand reputation are essential. For attracting shareholders and lenders, whatever the explicit price of such resources, the key lies in offering good guarantees to stakeholders in the form, for example, of real guarantees. Finally, from a more research-oriented perspective, our results show that attracting cheap financial resources is a reason for franchising. But if franchisees do not perceive lower risk and/or less agency problems they will not accept a lower return on assets and will not be cheap fund providers. This suggests that the idea of franchising as a collaboration among entrepreneurs is essential and we need to know much more about how franchisees and franchisors match each other. What do they look for in their partner? Unless we know the reasons for both decisions, we cannot know the real nature of franchising, an argument that could be extended to other types of alliance. Not only is it interesting to consider the psychological profiles of the different types of franchising entrepreneur (Grünhagen and Mittelstaedt, 2005) or the reasons why they might prefer to collaborate rather than remain independent ( Kaufmann, 1999 and Williams, 1999) but we should also find the determinants of the partner's choice. Knowing how a franchisee decides between two potential chains and how a franchisor selects its franchisees might clarify what parties are looking for in such alliances and the nature of their collaboration. A limitation of this work is that the econometric results seem sensitive to the proxy variable employed for the cost of capital. Further empirical research is needed to clarify these differences. Furthermore, we focused only on firms which, at least, intended to franchise and did not consider firms which had totally ruled out the possibility of franchising and were not looking for local partners. Inclusion of the latter, which would constitute an interesting future research line, would allow the direct relation between the cost of capital for the entrepreneur and the use of franchising to be assessed for the whole business universe. It might even reveal different reasons for starting to franchise. Finally, a longitudinal study might measure how franchising is affected by the evolution of financial markets, particularly debt and venture capital markets.