The choice of contract duration in franchising networks: A transaction cost and resource-based view

• Published in: Industrial marketing management 2018-11, Vol.75, p.125-133
• Main Authors: Gorovaia, Nina, Windsperger, Josef
• Format: Article
• Language: English
• Subjects: Franchise contract duration; Knowledge leverage function; Resource-based view; Safeguarding function; Transaction cost theory
• ISSN: 0019-8501; 1873-2062
• DOI: 10.1016/j.indmarman.2018.03.002

Contract duration as component of contract design has both a transaction cost savings function by mitigating exchange hazards and a strategic value creation function by leveraging knowledge-based resources. Previous studies have not explained the value creation function of contract duration in franchising. This study addresses this research gap. Specifically, we complement the transaction cost model of contract duration by developing resource-based hypotheses to explain the knowledge leverage function of contract duration. Using resource-based theory, we expect that intangible knowledge-based resources, such as system-specific knowhow and brand name of the franchisor, will positively influence franchise contract duration. This study contributes to the franchise and contract literature by highlighting that contract duration has – in addition to the safeguarding function - an important knowledge leverage function. Data from the German franchise sector provides support for the hypotheses. •Contract duration has both a transaction cost savings function and a strategic value creation function.•Transaction costs theory explains the safeguarding function of contract duration.•Resource-based theory explains the knowledge leverage function of contract duration.•Intangible system-specific knowhow of the franchisor positively impacts contract duration.•Intangible brand name assets of the franchisor positively impact contract duration.•Transaction-specific investments of franchisor and franchisee, and their interaction, positively impact contract duration.•Environmental uncertainty negatively impacts contract duration.