Can Franchisor Efforts Discourage Its Franchisees? Evidence from South Korea

We investigate a widespread concern that South Korean franchise relationships are exploitative by a comparative analysis of Korea-U.S. contracts and testing whether franchisor efforts can discourage its franchisees. A franchisor’s public effort, i.e., chainwide impacting effort such as advertisement, is essential for both the franchisor and franchisees’ survival, but is also a known channel of conflict between them. Given the agency problems of a hybrid organization, double-sided moral hazard, and stylized facts unique only to South Korean franchises, we ask whether there is a negative correlation between franchisor public effort and franchisee payoff, as accused by franchisee advocates. Although such accusations are not baseless, especially when compared with U.S. contracts, we show that franchisor public effort is unlikely to reduce franchisee payoff using brand-level data from the South Korean Fair Trade Commission. This hints that though Korean contracts are differently structured from U.S. ones, franchisor-franchisee incentives are still correctly aligned.