The Quality of Institutions and Organizational Form Decisions: Evidence from within the Firm

28 Pages Posted: 25 May 2017

See all articles by Francine Lafontaine

Francine Lafontaine

University of Michigan at Ann Arbor - Stephen M. Ross School of Business; University of Michigan at Ann Arbor - Department of Economics

Rozenn Perrigot

Université de Rennes I - Graduate School of Management (IAE-IGR)

Nathan Wilson

Government of the United States of America - Federal Trade Commission, Bureau of Economics

Date Written: Summer 2017

Abstract

In many retail and service sectors, firms have to establish a physical presence in a geographic market to access customers there. In countries where the quality of institutions is low, this can put assets at risk. We use data on the operations of a multinational, multibrand hotel company to show that in environments where local institutions are weaker—as proxied mainly by the World Bank's Checks index—the company eschews direct ownership. Rather than increasing its reliance on franchising, as predicted by some models, the company relies more on another form of organization commonly used in this industry, namely management contracts. We explain these patterns by emphasizing how the quality of the institutional environment affects the cost of using equity‐based organizational forms, per arguments in the current literature, but also the cost of enforcing the terms of franchise contracts.

Suggested Citation

Lafontaine, Francine and Perrigot, Rozenn and Wilson, Nathan, The Quality of Institutions and Organizational Form Decisions: Evidence from within the Firm (Summer 2017). Journal of Economics & Management Strategy, Vol. 26, Issue 2, pp. 375-402, 2017. Available at SSRN: https://ssrn.com/abstract=2972941 or http://dx.doi.org/10.1111/jems.12185

Francine Lafontaine (Contact Author)

University of Michigan at Ann Arbor - Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109-1234
United States
734-647-4915 (Phone)
734-936-0279 (Fax)

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States

Rozenn Perrigot

Université de Rennes I - Graduate School of Management (IAE-IGR) ( email )

11, rue Jean Macé
CS 70803
Rennes, Cedex 7 35708
France

HOME PAGE: http://www.rozenn-perrigot.com

Nathan Wilson

Government of the United States of America - Federal Trade Commission, Bureau of Economics ( email )

600 Pennsylvania Avenue, NW
Washington, DC 20580
United States
202 326 3485 (Phone)

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