Drawing from transaction cost and agency theories, the formal model links three independent factors (i.e., environmental uncertainty, behavioral uncertainty, and transaction-specific investments) with four governance modes that are associated with ascending levels of control (i.e., from master franchising, area development franchising, joint venture franchising, to wholly owned subsidiary). Additionally, drawing from resource-based and organizational capability theories, another three independent variables (i.e., system-specific assets, local market assets, and financial assets) are associated with the same four franchising governance modes. From these, a comprehensive model emerges.
The hypotheses are developed with considerable help and support from existing literature using the individual theories. The hypotheses make sense. For example, both environmental and behavioral uncertainties lead to a tendency to use lower control modes. Both transactionspecific investments and system-specific assets lead to a tendency to use higher control modes. Greater franchise partner efforts (either financial assets or local market access) favor a tendency to use lower control franchising governance modes. Moderator effects are also added.