Institutional constraints on organizations: the case of Spanish car dealerships

Abstract

We explain the choice between franchising and vertical integration by estimating a model of relative performance in a sample of 250 Spanish car distributors, controlling for self-selection and including environmental factors. The method allows us to estimate performance counterfactuals. Organizational choice seemingly aims to contain moral hazard for both distributors and manufacturers but it is subject to start-up constraints and switching costs. While the market for franchises remained underdeveloped, information asymmetries led to the opening of integrated outlets. Their subsequent conversion into franchised outlets probably involved prohibitive transaction costs. Consequently, they performed worse than would have been expected had they been independent, as confirmed by the systematic improvement observed when they were in fact converted. The timing of such conversions suggests that switching costs were prohibitive until firms developed a substantial cushion of temporary contracts, previously forbidden by regulation.

Differences in contract design between successful and less successful franchises

“…Return on assets (ROA), defined as Operating results/Total assets, indicates the company's performance achieved as a result of its investment in assets, irrespective of its financial structure. This is an indicator of the chain's profitability in the short run (Combs and Ketchen 1999;Combs et al 2004;Arruñada et al 2009). …”

“…See Tormo & Asociados (http://www.tormofranchise.com) and Spanish Franchise Association (http://www. franquiciadores.com) guides.4 Arruñada et al (2009, 2013 point out in their papers that institutional environment influences contract design. 5 These steps included calling key informants prior to asking for information, following up with repeated reminder mails or calls, promising a final survey report contingent upon their participation, signing confidentiality agreements and guaranteeing anonymous participation.…”

A Co-Word Analysis of Organizational Constraints for Maintaining Sustainability

“…Furthermore, risk can be affected by organizational constraints, e.g., there is a positive correlation between the familial risk of breast cancer and social constraints [40], and the cash flow risk will be increased when facing financing constraints [41]. In fact, organizations can also be constrained by institutions and groups, e.g., organizational choices and investment decisions [42], and the performance of Spanish car dealerships [43] can be determined by institutional constraints. The implementation and internalization of a best management practice model in an organization can be constrained by group behavioral factors (i.e., conflicts and tensions) [44].…”

Markets: State Franchise Laws, Dealer Terminations, and the Auto Crisis

“…pendent dealers rather than a move toward a more centralized distribution system. Indeed, Arruñada, Vázquez, and Zanarone (2009) show that vertically integrated Indeed, Arruñada, Vázquez, and Zanarone (2009) show that vertically integrated sales outlets, which are present in Spain, generally have much lower labor producsales outlets, which are present in Spain, generally have much lower labor productivity and lower profi tability than franchised dealerships. tivity and lower profi tability than franchised dealerships.…”