Effects of Contract and Trust on Franchisor Performance

Abstract

The franchisor-franchisee relationship is governed by contracts and trust. This paper analyzes how formal (contracts) and relational (trust) governance mechanisms affected franchisor performance in a service sector franchise for the period 2008¬2015. Using the SOM method in the empirical analysis, the results revealed that trust-based governance was more prominent than contractbased governance in the multi-unit franchise network and the cross-franchising network, negatively affecting franchisor performance in the multi-unit franchise network and positively affecting franchisor performance in the cross-franchising network. In contrast, contracts were more prominent than trust in single-unit franchising, negatively affecting franchisor performance. The primary practical implication is that the franchisor should prevent franchisees in the MUF network from opening new outlets in the same city and competing for the existing outlet’s customers.

Keywords: single-unit franchising, multi-unit franchising, cross-franchising, trust, contract

JEL Classification: M13, M31