Tabitha W Njuguna, Duncan E Ochieng, Cyrus I Mwangi



Purpose - This paper investigates the relationship between franchising propensity and financial performance of franchising organisations and explores literature on possible intervening and moderating factors on the relationship.

Methodology - This is a critical review of theoretical and empirical literature on franchising propensity and financial performance.

Findings - Literature reveals that most studies on franchising focus on the antecedents of franchising but very few examine the consequences moreover, the studies are anchored on either agency theory or resource scarcity theory. Studies examining the relationship between franchising and performance provide conflicting results. Some studies indicate that increasing the number of franchised units result to superior performance while other studies find no significant difference between franchising and running company owned units. The effect of franchising on capital structure of the franchisor has been examined by a few studies with no conclusive results. Furthermore, prior studies indicate that the relationship between franchising and performance is influenced by firm characteristics. There is a dearth of studies examining franchising in sectors other than the restaurant industry moreover there is need to use time series data to observe the consequences of franchising over time.

Implications: This review of literature mainly consists of studies carried out in developed economies which have superior business models and access to finance. Developing economies are mostly supported by small and medium enterprises and lack the skills and resources similar to advanced economies. Therefore, although developing economies stand to benefit more from the franchising model, there are few studies carried out in developing economies. Therefore, the findings of this study may vary in the developing economies.

Value: This study has presented a new dimension that may explain the inconsistent findings from prior studies and contribute to the discussion of franchising and firm performance. The relationship between franchising and firm performance may be moderated by firm characteristics and mediated by capital structure.

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