In addition to representing a huge portion of retail activity in the U.S. (i.e., there are approximately 1,500 operating franchising networks in the U.S. representing more than 760,000 franchisees and almost 18 million employees,  supplying $506 billion or about 11% of the U.S. private sector payroll and generating a total economic output in excess of $1.53 trillion which equals roughly 10% of the U.S. private-sector economy) and the world (i.e., franchising is touted to be the world’s fastest growing form of retailing), the franchising context affords us a particularly vivid example of a set of important and familiar questions involved in inter-organizational industrial organization.  Should a company use its own sales representatives or utilize manufactures’ representatives?  Should a company outsource its production or should it build internal capacity?  Should a corporate function be organized as a tightly controlled entity or a loosely controlled one?  Or most generally, should a firm make or buy?  Embedded in these questions is the recognition that if a company does choose to maintain control over the function, it must grapple with increased fixed expenditures.  Alternatively, if it chooses to disengage in the function, it loses some level of control and potentially suffers from diminished profitability.

Within the franchising context this question takes on the following form: Should a retailer-entrepreneur give up direct control of a focal retail unit to a franchisee partner or should the entrepreneur acquire and expend the resources necessary to operate the focal unit as a company owned store?  In this context, the question is complicated by the intangible nature of some of the assets needed to succeed (i.e., local market knowledge and managerial talent) in the retailing operation.  Will a new retailer-entrepreneur with few tangible assets be able to attract the intangible resources needed to retain direct control of its expanding chain?  Or even if the retailer-entrepreneur wants to relinquish control, will it be able to convince a prospective franchisee of the value of the intangible assets granted by the franchise?  And finally, what happens as the franchise network matures and the scarce resources, erstwhile available only through its franchisee partners, become increasingly available to the retailer-entrepreneur (i.e., the impact of organizational learning on ownership redirection thesis)[1]?

In this study, we examine this final question utilizing the theoretical framework of property rights theory.  The property rights theory holds that the party with greater access to the relevant knowledge bases (e.g., local market knowledge) should have greater rights to the ownership of outlets and the resultant profits generated by the operation.  In other words, as the franchise system matures, provided it accumulates the relevant intangible knowledge bases in time, it earns the rights to operate greater numbers of company-owned units.  Our findings, based on data from the Austrian franchise sector, largely support the above theoretical arguments, and yield practically relevant knowledge for the franchisor-retailer.  According to the property rights explanation of the ownership dynamics of franchising networks, then, franchisors are encouraged to get access to the critical local market resources to increase their bargaining power and hence their ownership stake in the franchise network during the evolution of their organizational life cycle.  The implication is that, normatively, a successful franchise system should adjust the proportion of company-owned outlets to correspond with its acquisition of critical local market knowledge.  In sum, then, our study is very important managerially for the retailer-franchisor because it specifies the conditions under which the franchisors should and could increase their proportion of company-owned outlets during the organizational life cycle and in turn, increase their profitability.