Prior interactions and contractual completeness in Spanish franchising

Abstract

Acknowledgments:This paper has benefited from the support of the Spanish Ministry of Economy and Competitiveness (MINECO-13-ECO2013-40407R). Prior Interactions and Contractual Completeness in Spanish FranchisingPrior interactions between partners had led authors to emphasize the importance of relational contracting in interfirm relationships. We discern two learning effects from prior interactions (about the partner and about the transaction) to show that formal contracting is ubiquitous in franchising. Using a sample of 74 contracts from SME Spanish franchises, our results indicate that experienced franchisors complete their contracts more, always introducing more contingencies, even those relating to their own obligations. Furthermore, franchisor's reputation does not only not reduce the degree of completeness regarding the franchisor's obligations, but increases the franchisees' obligations. These findings suggest, first, that franchisors prefer formal contracting because it is feasible and affordable for them and signals their commitment to the chain in a more credible way and, second, that formal and relational contracting do not seem to work as substitutes. We conclude that formalization is always necessary to enforce franchise agreements, regardless relational contracting.efficiently structure their agreements (Reuer and Ariño 2007;Ryall and Sampson 2009; Vanneste and Puraman 2010). Parties learn from each other and therefore develop a mutual understanding, shared values and normative conventions that define how they will work together (Poppo, Zheng and Li 2016, p. 726). They mainly generate knowledge about the partner's behavior, familiarity and interorganizational trust. This is what some authors call knowledge-based trust (Yamagishi and Yamagishi 1994), and others relational trust (Ring 1996;Poppo et al. 2016). All these create an "expectation that alleviates the fear that one's exchange partner will act opportunistically" (Bradach and Eccles 1989, p.104), facilitating the use of relational governance mechanisms (Gulati 1995;Zollo, Reuer, and Singh 2002;Gulati and Nickerson 2008).However, this relevance of relational contracting does not seem to hold in all kinds of interorganizational agreements, among which franchising is an example. Franchising is a type of interfirm relationship in which a firm, the franchisor, grants the right to use its brand and a proven business concept to legally independent firms, the franchisees, under certain conditions and in exchange for financial compensation (entry fee and royalties). Some empirical evidence suggests that, in franchising, formal contracting is the main instrument for enforcing the relationship between franchisor and franchisees (Brickley and Dark 1987; Solís and González 2012), even when they have already renewed their contract several times. Why is relational contracting not the basis for franchising? More generally, there is another type of prior interaction to which the literature on interfirm relationships has paid hardly any attention. This is whe...

Entrepreneurial process in international multiunit franchise outlets: A social capital perspective

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Renegotiation of joint venture contracts: The influence of boards of directors and prior ties as alternative governance mechanisms

“…Some scholars argue that, as a consequence of inter-partner familiarity, trust, learning and the development of collaborative routines, prior ties alleviate the need for costly contracts and substitute for formal governance (e.g., Gulati and Singh, 1998;Uzzi, 1997). Others posit that both mechanisms reinforce each other and act as complements (e.g., Poppo and Zenger, 2002;Ryall and Sampson, 2009;Solís-Rodríguez and González-Díaz, 2018).…”

Multi-Unit Franchising and Relational Governance: A Study of Operating Networks in Brazil

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