The Effects of Asymmetry Structures between Franchisor and Franchisee on Governance Strategies

The franchising industry of Korea has been significantly developed in both quantitatively and qualitatively over the years. Along with the proliferating franchise systems, a number of disputes between the franchisor and the franchisee have been increased. The relationship between the franchisor and the franchisee are generally unfair because the most of franchisees are individuals or small merchants, there is no choice for the franchisee but to be in an inferior bargaining position to the franchisor. This imbalance of power is inherent in the relationship from the initial stage of franchise business. The asymmetrical structures of power between the franchisor and the franchisee have been studied in the notion of dependenc and the franchisor-franchisee relationship is asymmetric in terms of power advantage of the franchisor. Extending this research, the present study argues for the governance strategies. In any franchise system, in particular, the choice of governance strategies is a key management decision. To provide standardized goods or services, franchisors need to effectively govern and control their relationships with franchisees. The current study, consequently, employs two dominant safeguards as a way to elucidate the governance strategies. With considerations of these governance strategies, the asymmetries which exists in the relationship can be effectively managed and reduced, in turn, performance will be improved. In addition, although environmental uncertainty is extensively considered in transaction literature, few empirical researches demonstrated their interplay with the asymmetry inherent in a franchise relationship. Based on a sample of 104 franchisor-franchisee dyads, transaction-specific asymmetry and information asymmetry show negative effects on relational governance. Also, under high environment uncertainty relational governance is likely to be used as asymmetry between the franchisor and the franchisee increases. Contractual governance is increased when the franchisor makes more transaction-specific investments than the franchisee and the franchisee has less information than the franchisor. On the other hand, contractual governance is decreased when the franchisor has less information than the franchisee. Finally, relational governance has a negative effect on franchisee opportunism.