Control Modes in International Service Operations: The Propensity to Franchise

What determines a service firm's organizational choice between equity-based control and franchising? This question, which has elicited some theoretical answers and a few empirical tests in a domestic setting, has never been addressed in an international context before. This study explains the mode of control chosen in terms of a theoretical framework which borrows from agency theory and transaction cost analysis. The propensity to franchise internationally was found to be directly related to (i) monitoring costs associated with geographical and “cultural” distance between the principal (franchisor) and its foreign agents (franchisees), (ii) the principal's international experience, and (iii) the degree of host countries' contextual uncertainty but inversely related to the service firm level of brand name asset specificity.