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Chapter 4. Sample descriptions and Methodology
SAMPLE AND DATA DESCRIPTIONS
To obtain information on the franchise tendency characteristics for a sample of franchise firms, I collect 970 samples from two complementary sources- Entrepreneur Magazine and Franchise Times Magazine issued in 2006 to 2013 to enhance completeness of the research in the viewpoint of international. The Annual Franchise 500 published by Entrepreneur Magazine provides information about franchised chain
name, funding year, franchise year, initial capital, franchising fee, royalty fee, availability of U.S region and foreign region (sample in Appendix I). The Top 200 Franchise Systems published by Franchise Times Magazine provides the top 200 chains’ worldwide sales, foreign units and domestic units of the business chain (sample in Appendix II).
Both sources’ rankings are based on U.S. franchisor surveys, and published figures only include franchisors that responded to the surveys. Both of magazines check the figures provided by franchisors before publishing them. The information is generally objective because franchisors do not have any particular interest in providing incorrect information that would be quickly detected by prospective franchisees (Shane, 1996). Many of previous empirical research relied on these data (Alon, 2001; El Akremi et al., 2013; Elango, 2007; S. Shane, 1998).
In the process of matching these two data, the combination process is to match the franchise name provided by Entrepreneur Magazine to franchise concept and franchise
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parents that provided by Franchise Times Magazine. There were 970 firms from 2006 to 2013 that are reported by these two magazines. Table 1 describes the definition of variables used in this thesis in details.
VARIABLE DESCRIPTIONS
Dependent Variable: Tendency of franchise
To test the above hypotheses, this paper uses total franchise units divided by total units as franchising tendency proxy. In the franchise mechanism, franchisees provide managerial skills to update the chain’s knowledge, fostering innovations by using knowledge on local markets, making new capabilities available, and hence fueling franchisor growth and making substantial investments in their units (Shane, 1998).
Company ownership, in contrast, promotes standardization, guarantees valuable replication, eliminates double moral hazer problem and effectively execute entrepreneurs business model. However, franchising is useful when demand is growing and uncertainty exists. As the proportion of franchised units increases, resource could be provided by franchisees, acknowledge updating and performance improve. Following Shane (1996), this paper contributes to prior literature by adding performance factor into discussion to explain the question of why firms franchise or why they are not completely company-owned.
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Independent Variable:
Franchise speed (FS)
Following Lafontaine (1992), Franchise speed is measured as the number of years between the founded year of the firm and the year the firm began to franchise. The length of time between the founding of the company and its first effort to franchise is considered because franchisors can build up company-owned outlets before franchising.
According to the resource scarcity theory discussed in previous sections, I assume that there is a negative relationship between the length of franchise speed and franchising tendency.
Capital
Capital is measured as the dollar value in thousand of the investment necessary to open an outlet. This variable has been used in studies by Caves and Murphy (1976), Elango (2007). Due to the scale problem, we took logarithm on capital dollar amount in the regression model.
Franchise Fee
The franchise fee is measured as the million dollar amount of the up front fee that the franchisee must pay to the franchisor to buy the franchise outlet. This variable has been used by Caves and Murphy (1976), Tsang (2013).
Royalty Rate
The royalty rate is measured as the percentage of outlet sales that franchisees must
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pay to franchisors for participation in the system. This variable has been used by Elango (2007).
Experience
Experience is measured as by franchising experience year period. This mechanism followed Elango (2007), which measures monitoring experience to capture if the franchisor had opportunities to develop monitoring skills. Franchise age is calculated by data point year minus the year the franchise chain adopted franchising. The age of the company is included in El Akremi et al. (2013) to examine the relation between age and franchise chain’s performance .
Internationalize
Internationalize is measured as by international units divided by total outlet units.
In the topic of internationalize, most of studies investigate the factors of internationalization. This paper follows the mechanism used in Contractor and Kundu (1998) to investigate the franchise modal in global hotel sector, Contractor and Kundu (1998) used the ratio of foreign to total number of hotels as the proxy of international experience.
Performance
Performance is measured as worldwide sales (in MM) of the franchise chain provided by Franchise Times Magazine. El Akremi et al. (2013) has found out proportion of franchised units has curvilinear influence on chains’ performance. In this
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paper, though we adopt sales as the proxy of performance.
Control variable:
Seeking foreign
Seeking foreign is a dummy variable, which is one if Entrepreneur Magazine indicated the franchise chain seeks for foreign expansion opportunity and others are zero. When entrepreneur seeking the opportunity to expand overseas territory, the decision of opining units by franchising or company-owned might be different.
Financing Provided
Financing provided is measured as a dummy variable, which is one if Entrepreneur Magazine indicated that the franchisor provides financing to new franchisees following Shane (1996). The provision of financing is controlled because financing makes franchises easier to sell and this might cause the tendency of franchise different.
Varied contract
Some franchise contract information of initial capital, franchising fees and royalty fee that provided by Entrepreneur Magazine are not fixed amount or percentage. To compromise and evaluate the influence of this effect, this paper add in the dummy variable which is one if one of initial capital, franchising fees and royalty fee is not a fixed amount or percentage. Table 2 presents summary of distribution on varied contract by industry. A varying contract may bring higher franchise flexibility.
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Therefore, this paper controls the varied contract.
Parent adjustment
When conducting combination of two data resource, here’s the problem of inconsistent in franchise concept and franchise parent occurred in hotel and motels industry. Franchise Times Magazine provides franchise information of franchise concept and detail information of the concept’s world sales and franchise parent, foreign units and domestic units. Entrepreneur Magazine, however, provide the name of franchise which doesn’t’ differentiate the franchise concept or franchise parents and provide information about the franchised chain name’s funding year, franchise year, initial capital, franchising fees, royalty fee, availability of U.S region and foreign region. The combination process is matching the franchise name provided by Entrepreneur Magazine to franchise concept and franchise parents that provided by Franchise Times Magazine. In the hotel and motels industry, some franchise names
provided by Entrepreneur Magazine failed to match the franchise concepts but franchise parents’ name provided by Franchise Times Magazine. In our sample, 75 out of 203 hotels and motels firms has this problem. In this case, to compromise data matching, this paper used franchise parents’ funding year, franchise year, franchising fees, royalty fee, availability of U.S region and foreign region data that provided by Entrepreneur Magazine as the franchise concepts’ information with the assigned dummy variable to be one if the data point is adjusted in the prior situation.
Industry
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Industry is a dummy variable for franchisors in each of the following industries:
automotive, food, hotel and motels, retail, and service. While Entrepreneur Magazine separates industries in 13 industries type, this paper takes business services, children's business, financial services, home improvement, maintenance, personal care, pets, recreation, and service as a join industry category named service. The characteristics of the industry segment in which the franchise system is found might influence entrepreneurs' preferences for organizational form (Caves & Murphy, 1976). The usage of aggregate industry categories is consistent with previous research on franchising (Shane, 1998). This industry categorization scheme helps to ensuring control on the different entrepreneur’s franchising tendency behavior within industries.
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