Experimenting with Firm Boundaries: The Case of Franchising

Abstract

This paper studies firms’ strategic adoption of franchising, an alternative organizational form, in the process of geographic expansion. Analyzing comprehensive data of franchise establishments, we find that corporations typically franchise in new, remote, and rural markets, but less so when direct flights become available. Local franchisees’ investments notably forecast house price growth, while franchisors' investments do not, indicating franchisees' superior information about local markets. Franchisors increase direct investments in markets where existing stores perform well, with followers outperforming pioneers on average. These findings suggest that franchising serves as a strategic tool to mitigate information friction when corporations explore unfamiliar markets.

Keywords: Franchising, Firm Boundaries, Experimentation, House Prices

JEL Classification: G32, L22, M21