Introduction
International retail
franchising: an agency
theory perspective
Anne Marie Doherty and
Barry Quinn
The authors
Anne Marie Doherty and Barry Quinn are Lecturers in
the School of Commerce and International Business
Studies at the University of Ulster, Coleraine, Northern
Ireland, UK.
Keywords
Franchising, Retailing, International trade, Globalization,
Market entry, Agencies
Abstract
International retailers are increasingly using franchising as
a means of entering foreign markets. However, interna-
tional retail franchising lacks a conceptual basis from
which an explanation of the major elements of this
activity can be generated. Agency theory and its major
premises of information asymmetry, monitoring costs,
moral hazard and opportunism, are introduced in an
attempt to provide an initial effort at bridging this
conceptual gap. The paper reviews international retailing
and franchise research before explaining agency theory. A
discussion follows on how agency theory can explain
major elements of international franchise activity of retail
firms such as the international retail franchise process and
the operationalisation of the international retail franchise
system.
International Journal of Retail & Distribution Management
Volume 27 . Number 6 . 1999 . pp. 224±236
# MCB University Press . ISSN 0959-0552
224
Research and interest in the subject of
international retailing has increased dramati-
cally in recent years (Burt, 1991; Brown and
Burt, 1992; Dawson, 1994; Alexander,
1997). In terms of entry mode strategies
available to international retailers when ven-
turing abroad, franchising is proving an
increasingly popular method of expansion
(Quinn, 1998a). In the past franchising has
typically been associated with the service
sector. However, for niche retailers such as
Body Shop, Benetton, Mothercare and
others, franchising is the cornerstone of their
international expansion activity. Despite this
increase in the practical use of franchising by
international retail firms, it is only relatively
recently that academic research has begun to
examine international franchising in the con-
text of retailer internationalisation
(Whitehead, 1991; Sparks, 1995). As such,
no conceptual development of international
retail franchising exists in the literature.
This paper proposes to employ agency
theory (Jensen and Meckling, 1976; Fama
and Jensen, 1983) to provide a much needed
explanation of international retail franchising
activity. Developed in the information eco-
nomics literature, agency theory is based on
the relationship between one party (the
principal) who delegates work to another (the
agent). In the context of this principal-agent
relationship, agency theory highlights the
importance of the information transfer pro-
cess, the information asymmetry problem and
associated monitoring costs. These are factors
which are deemed pivotal to international
retailers' entry mode choice decision
(Doherty, 1998). This information asymme-
try problem is accentuated, firstly, in
industries where a significant amount of
intangible assets exist, such as retailing, and,
secondly, in international markets. As the
principal-agent relationship parallels the
franchisor-franchisee relationship, agency
theory encompasses factors this paper regards
as crucial in explaining franchising as an
operating strategy for international retailers.
While there is large support for an agency
perspective as an explanation of franchising in
the domestic context (Brickley et al., 1991;
Lafontaine, 1992), as yet there has been no
attempt to explain international retail fran-
chising by the same method. In this study, the
international franchise activity of retail
 International retail franchising: an agency theory perspective
Anne Marie Doherty and Barry Quinn
companies is conceptualised in terms of two
key interrelated components: firstly, the in-
ternational retail franchise process, which
consists of the direction of activity and type of
franchise strategy employed and, secondly,
the actual operationalisation of the retail
franchise system. These components are
central to Quinn's (1998a) framework for the
study of franchising as a strategy for retailers
expanding into international markets. By
adopting an agency perspective, further in-
sights into the process and operationalisation
of international retail franchise activity will be
provided.
The paper begins with a brief literature
review of pertinent research on international
retailing, international retail franchising and
domestic and international franchising. It
continues by providing reasons for the use of
agency theory in the international retail
franchise context before outlining the main
tenets of agency theory. The importance of
information asymmetry in the context of
franchising as an entry mode strategy for
international retailers is then highlighted. The
main body of the paper contains a detailed
discussion of how agency theory, through its
focus on information asymmetry and mon-
itoring costs in the context of the principal-
agent problem, can explain major aspects of
the retail franchise mode of international
expansion. The paper concludes with a
summary and a discussion of the possible
directions for future theoretical and empirical
research into the area of international retail
franchising.
Literature review
International retailing and international
retail franchising research
While the internationalisation of retailing is
said to involve three distinct, albeit related,
phenomena ± the sourcing of products, the
development of operations, and the transfer of
expertise (Dawson, 1993) ± the majority of
research studies have been concerned with the
physical operation of stores in overseas
markets (Burt, 1993). This research has
focused on the motives or reasons for inter-
national expansion (Alexander, 1990; 1994;
1995a; 1995b; Williams, 1992; 1994), as well
as describing the extent and direction of
activity and the operating strategies employed
by international retailers (Robinson and
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Volume 27 . Number 6 . 1999 . 224±236
Clarke-Hill, 1990; Laulajainen, 1991; 1992;
Treadgold, 1991; Laulajainen et al., 1993;
Pellegrini, 1994; Davies and Fergusson,
1995; Sparks, 1995; Clarke and Rimmer,
1997; Sternquist, 1997). In terms of market
entry mode strategies available to interna-
tional retail companies, franchising has
proved an increasingly popular mode of
operation in recent times.
Franchising, as commonly defined, is an
organisational form based on a legal agree-
ment between a parent organisation (the
franchisor) and a local outlet (the franchisee)
to sell a product or service using a process and
brand name developed and owned by the
franchisor. The franchisor typically provides
the franchisee with the right to use this
intellectual property in return for a lump sum
payment and an annual royalty fee based on
sales for a specified period of time. The term
``franchising'' has been applied to describe a
wide variety of business activities, but the
modern day franchise system evident on the
high street is commonly known as business
format franchising. Grant (1985, p. 4) defines
business format franchising as:
the granting of a license for a predetermined
financial return by a franchising company (the
franchisor) to its franchisees, entitling them to
make use of a complete business package,
including training, support and the corporate
name, thus enabling them to operate their own
businesses to exactly the same standards and
``format'' as the other units in the franchised
chain.
The strategy of franchising has been tradi-
tionally associated with the service sector, and
in particular the fast food restaurant business
(English and Willems, 1992). However, in
more recent times, franchising has been
increasingly adopted across a range of other
retail sectors (Corporate Intelligence Group,
1996). As stated, for niche retailers such as
Body Shop, Yves Rocher, Sock Shop and
Benetton, it has become the cornerstone of
international expansion activity, providing
them with the opportunity to rapidly build a
global operation, without exerting consider-
able financial pressure on domestic retail
operations. Franchising has also found favour
among more traditional retailers, those com-
panies without a strong global appeal, where
it has been employed as part of a balanced
portfolio of entry strategies, rather than as the
sole means of international expansion. Such
companies have included the supermarket
and hypermarket operators Casino (France)
 International retail franchising: an agency theory perspective
Anne Marie Doherty and Barry Quinn
and GIB (Belgium) and UK variety stores
Marks and Spencer and BhS. In such cases it
has often been used as a low cost/low risk
alternative for expansion to internationally
diverse economies. Furthermore, according
to Sternquist (1997), franchising is particu-
larly appropriate for retail companies that are
not reliant on ``company secrets''. For British
retailers at least, whilst internal growth
remains the preferred entry method, fran-
chising has become a significant alternative
over the past twenty years. According to Burt
(1995), in the 1980s it accounted for 24 per
cent of all UK foreign retail investments, up
from a mere 3 per cent in the 1960s. During
the 1991-1993 period, franchising accounted
for 54 per cent of cross border moves under-
taken by UK retailers. At this point UK
retailers used franchising to a greater extent
than international retailers from any other
country (Knee, 1993). By the mid-1990s, 35
of the 92 British companies with overseas
retail interests employed franchising to some
degree (Corporate Intelligence Group, 1996).
Despite the increase in the utilisation of
franchising by international retailers, the
research community has only recently begun
to examine international franchising within
the context of retailer internationalisation
(Sanghavi, 1991; Manaresi and Uncles, 1995;
Quinn, 1998a). As yet, therefore, there has
not been any theoretical examination of, or
explanation for, international retail franchise
activity. Indeed, this gap in knowledge reflects
a general paucity of theoretical research on
one of the most significant elements of the
retailer internationalisation process, namely,
retailer market entry mode strategy. The entry
mode decision process of international retail
companies has largely been overlooked in the
international marketing literature where most
attention has been afforded to examining
entry mode strategies of manufacturing-based
companies and other service sectors (Erramilli
and Rao, 1990; Hill et al., 1990; Erramilli,
1991; Agarwal and Ramasawami, 1992; Kim
and Hwang, 1992; Gannon, 1993; Driscoll
and Paliwoda, 1997).
Domestic and international franchise
research
Historically, the majority of research in the
franchising domain has focused predomi-
nantly on domestic franchising activity,
primarily within the US market (Forward and
Fulop, 1993). This literature has paid little
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Volume 27 . Number 6 . 1999 . 224±236
attention to the special characteristics of retail
franchising, focusing instead principally on
the manufacturing sector and, to a lesser
extent, on other service sectors, particularly
fast food franchising (English and Willems,
1992). In a comprehensive review of the
franchise literature, Elango and Fried (1997)
identified three broad categories of research:
franchising and society, creation of the
franchising system and operation of a fran-
chising system. This second strand of
research, the creation of a franchising system,
has proved a heavily debated topic within the
franchise literature. Much of the research in
this area has adopted economic concepts and
theories which offer several explanations of
why companies, in general, adopt franchising
as a way of conducting business in the
domestic market. In summary, two theories
dominate this literature, namely, resource
allocation theory and agency theory (Fulop
and Forward, 1997). Significantly, several
authors have argued that resource shortages
are less able to explain franchising than are
agency theory and monitoring (Caves and
Murphy, 1976; Rubin, 1978; Blair and
Kaserman, 1982; Mathewson and Winter,
1985; Brickley and Dark, 1987; Martin,
1988; Norton, 1988; Lal, 1990; Brickley et
al., 1991; Dant et al., 1992; Lafontaine, 1992;
Sen, 1993; Combs and Castrogiovanni,
1994).
With regard to the international franchising
context, the limited research which has been
undertaken has drawn theoretical explana-
tions primarily from the behavioural
exporting and international marketing litera-
ture (Welch, 1989; 1990; Eroglu, 1992;
McIntyre and Huzagh, 1995), and, to a much
lesser extent, from international economics
(Huszagh et al., 1992; Karuppur and Sashi,
1992). Again, this research is dominated by
studies on the manufacturing sector and other
service sectors, with retailing receiving little or
no attention. Consequently, previous research
on the overseas expansion of franchisors has
not provided a sufficient conceptual explana-
tion for the international franchise activity of
retail firms. In order to provide an initial step
in rectifying this deficiency, this paper adopts
an agency theory perspective to explain the
major elements of international retail fran-
chise activity.
 International retail franchising: an agency theory perspective
Anne Marie Doherty and Barry Quinn
Conceptual development
The conceptual basis for this paper lies in the
domain of agency theory. Previous studies
utilising agency theory have focused predo-
minantly on corporate governance (see
Schleifer and Vishny (1997) for an excellent
review of this literature). It has also been
applied to topics such as retail sales compen-
sation (Eisenhardt, 1988); international joint
venture formation (Reuer and Miller, 1997);
supplier-distributor relationships (Lassar and
Kerr, 1997) and, as already discussed, to
franchising in the domestic market (Rubin,
1978; Mathewson and Winter, 1985; Brickley
and Dark, 1987). Notably, while agency
theory has been successfully applied to
domestic franchising, an agency perspective
has not been developed in the international
retail franchise context. The international
retail franchisor-franchisee relationship em-
bodies the principal-agent model and meets
Eisenhardt's (1989) requirements for a useful
application of agency theory, that is, the two
parties are interdependent and co-operative
yet rationally may pursue different, even
contradictory goals (Lassar and Kerr, 1997).
The advantages of using agency theory to
explain many of the aspects of the interna-
tional retail franchisor-franchisee relationship
parallel at least two of those cited by Lassar
and Kerr (1997) in their application of agency
theory to the manufacturer-supplier relation-
ship. These advantages are, firstly, that
agency theory incorporates realistic beha-
vioural assumptions such as the presence of
bounded rationality and the potential for
opportunism and goal conflict, all of which
are present in the franchisor-franchisee rela-
tionship. Secondly, agency theory is
appropriate because it focuses on the eco-
nomic motives operating within a
relationship, that is, risks and incentives. A
third advantage, not cited by Lassar and Kerr
but which is more particularly applicable to
the international retail franchise context, is
agency theory's emphasis on profit maximi-
sation through intermediate product markets,
that is, knowledge, technology and goodwill
(intangible assets). Asset intangibility is a
particular feature of the retailing sector, with
its company and product brands, retail for-
mats and managerial technology, all of which
are characteristic of embedded information.
The fourth, and particularly significant ad-
vantage of agency theory in the international
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retail franchise context, is its emphasis on the
importance of the information transfer pro-
cess, the information asymmetry problem and
associated monitoring costs. These are factors
regarded as central to international retailers'
entry mode choice decision (Doherty, 1998).
International markets and industries where a
significant amount of intangible assets exist,
such as retailing, emphasise this information
asymmetry problem. Agency theory thus
encompasses factors this paper considers
critical in explaining franchising as an oper-
ating strategy for international retailers. It is
to an explanation of the key aspects of agency
theory that this discussion now turns.
Agency theory
Agency theory is based on the concept of the
principal-agent relationship. In this relation-
ship, principals represent individuals, or
groups of individuals, who are in control of a
set of economic functions or assets in some
form of ownership or property rights. Day-to-
day control of these functions or assets have
been delegated, by the principals, to agents,
who operate them on their behalf (Jensen and
Meckling, 1976). In the standard theory of
the firm, under the divorce of ownership from
control, shareholders represent the principals
in the relationship and management of the
agents.
Information asymmetry
Arrow's (1962) paradox of information
asymmetry highlights the main problem as-
sociated with information transfer inherent in
the principal-agent relationship. This paradox
states that the information buyer does not
know exactly what he is buying but, if the
seller were to provide the potential buyer with
that information he would be transferring it
free of charge. In such circumstances, the
ownership advantage the supplier had in an
asset would be given away without any gain.
This problem is avoided if the firm possesses
knowledge embedded in non-tacit physical
goods for which an efficient patent system
exists and which can be transferred on the
market. If the knowledge, which is to be
transferred, is of a tacit nature, that is, that
which cannot be described in a patent and
therefore must be transferred by people, the
problem of information asymmetry arises.
This information asymmetry problem arises
in the principal-agent relationship because
 International retail franchising: an agency theory perspective
Anne Marie Doherty and Barry Quinn
agents, being in day-to-day control of a
company, have detailed knowledge of its
operations. The principals have neither access
to this knowledge, nor, in many cases, the
ability to interpret information, if access was
perfect. As Jensen and Meckling (1976)
originally theorised, agency problems arise
from the information asymmetry that results
from the division of labour between the
principal and the agent and from the potential
goal conflict and risk preferences of the two
parties.
Moral hazard
Information asymmetry becomes a problem
in the principal-agent relationship when
combined with moral hazard. Moral hazard is
the potential for agents to operate in their own
self-interests against the objectives of the
principals. The potential for moral hazard,
combined with information asymmetry, can
potentially place principals at a severe
disadvantage. Consequently, principals
require an effective mechanism to control
agent behaviour before entering into a prin-
cipal-agent relationship. One effective
mechanism involves monitoring agent beha-
viour.
Because of the complex internal organisa-
tion of many firms, detailed monitoring of
investment policy and day-to-day financial,
production and marketing behaviour would
be prohibitively expensive. This problem
would be accentuated in cases where teams
possessing largely specialist knowledge would
be required to undertake the monitoring.
Financial markets, where much of this agency
theory has been applied, solve the monitoring
problem by a combination of building pre-
miums into a company's cost of capital and
drawing up financial contracts. The perceived
seriousness of a potential agency problem has
a direct impact on the extent of the premiums
and the complexity of the contracts. In the
case of international retail franchising where
information asymmetry is a significant pro-
blem, the potential for moral hazard and
opportunism, whereby the franchisee fails to
exert sufficient effort on the behalf of the
franchisor, is catered for through strict con-
tracting and royalty payments and fees. Thus,
as in the contexts of previous studies, an
agency perspective is deemed crucial to the
explanation of international retail franchising
as it provides an ``understanding of
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Volume 27 . Number 6 . 1999 . 224±236
organisational relationships where control is
exercised under conditions of potential goal
divergence and incomplete information''
(Lassar and Kerr, 1997, p. 615).
Notably, for large firms whose shares are
actively traded on the stock market, this
information asymmetry problem recedes in
importance. It can, however, remain a sig-
nificant problem for companies which have
large amounts of intangible assets in the forms
of brand names, research and development
and advertising (Hutchinson, 1995). As sta-
ted, asset intangibility is a particular feature of
the retailing sector, with its company and
product brands, retail formats and managerial
technology, all of which are characteristic of
embedded information.
International retail franchising and
information asymmetry
Doherty (1998) has asserted that the ease or
complexity of the information transfer pro-
cess, with its consequences for the
information asymmetry problem, has a pivotal
role to play in explaining entry mode choice of
international retailers. It is suggested here that
it has an even more crucial role to play in
explaining international retail franchising,
given franchising's particular emphasis on
intellectual property and costs, through pay-
ments and royalty fees, associated with the
franchise agreement and the franchise pro-
cess; the profusion of intangible assets in the
retailing sector; and international retailing's
focus on managerial technology and trading
relationships.
Information asymmetry arises because
markets for information are imperfect. The
complex regulatory, economic, social, cultur-
al, and retail structural boundaries which
characterise the international retailing con-
text, coupled with the aforementioned sector
specific intangible assets, can either ease or
complicate the information transfer process,
thus lessening or accentuating the informa-
tion asymmetry problem. In the case of
international retailing, the information asym-
metry problem can manifest itself in many
forms. It may be present, for example, where
differing levels of economic development exist
between foreign and domestic markets, where
there are differences in retail regulation with
regard to employment law, planning
 International retail franchising: an agency theory perspective
Anne Marie Doherty and Barry Quinn
regulations and opening hours, and where the
internationalising firm's ability to assess the
risk of the foreign venture is limited due to
these complexities. Other examples arise
where cultural practices of both consumers
and management differ between the home
and host countries, where human resource
management practices differ, and where the
degree to which domestic managers would be
exported to run and better monitor the
foreign operation varies.
Given its emphasis on profit maximisation
through intermediate product markets,
agency theory highlights the information
asymmetry problem. Significantly, interna-
tional retail franchising explicitly parallels the
principal-agent relationship with the franchi-
sor-franchisee relationship. The management
of the parent company considering interna-
tionalisation, that is, the franchisor, is viewed
as the principal, and the management oper-
ating in the non-domestic market, that is, the
franchisee, as the agent. As such, it focuses on
information asymmetries which result from
asset intangibility associated with interna-
tional retailing; specific intellectual property
issues related to the franchising contract and
process; and monitoring costs in the form of
royalty payments and fees which try to
account for the potential for moral hazard.
International retail franchising thus provides a
contractual way of dealing with the informa-
tion asymmetry problem in international
retail markets. How agency theory can
explain major aspects of international retail
franchise activity is the focus of the next
section.
Agency theory as an explanation for
international retail franchising
Having outlined the key principles of agency
theory and the links with international retail
franchising, the paper now proceeds by
providing an explanation of international
retail franchising activity in the overall context
of agency theory. As indicated in the intro-
duction to this paper, international retail
franchising may be considered to consist of
two key components: the international retail
franchise process and the operationalisation
of the franchise system. While these dimen-
sions are obviously interrelated, for the
purposes of clear explanation and
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Volume 27 . Number 6 . 1999 . 224±236
presentation they are now treated separately
in the sections which follow.
The international franchising process
Direction of activity
Two central aspects of the international
franchising process are the direction of
activity and the type of franchise agreement
the company chooses to use when entering
the foreign market. With regard to the former
issue, traditionally, many retailers have used
franchising as a means of entering interna-
tionally diverse economies where a major
factor in choosing an entry mode has been to
select the one with least cost/least risk. For
this reason, many UK retailers have entered
southern European retail markets through
franchising (Corporate Intelligence Group,
1996), as have international retailers who
have entered the retail markets of eastern and
central Europe since the liquidation of the
communist regime (Corporate Intelligence
Group, 1992; 1995; McGoldrick and
Holden, 1993). British clothing retailers such
as BhS, Mothercare, Jaegar, Mulberry and
Next are using franchising to enter new
markets in Asia Pacific and the Middle East.
Notably, Marks and Spencer's franchise
operation exists in such locations, but it
operates through organic growth or acquisi-
tion in more local European markets such as
France and The Netherlands (Jay, 1997).
Conventional internationalisation literature
would explain this phenomenon using the
psychic distance argument which emphasises
cultural and geographic distance/proximity
(for example, Johanson and Vahlne, 1977;
Bilkey, 1978; Weidersheim-Paul et al., 1978;
Cavusgil, 1980; 1982; Welch and
Weidersheim-Paul, 1980; Cavusgil and
Nevin, 1981). Indeed, recent research into
retailer internationalisation (Burt, 1993;
Dupuis and Prime, 1996) supports the gen-
eral assertion of an initial preference for
geographical and cultural proximity, evolving
over time to encompass a wider range of
markets exhibiting higher elements of risk.
Psychic distance, however, does not take into
consideration the fundamental issues of in-
formation asymmetry or cost. Using an
agency theory perspective, adopting franchis-
ing as an entry mode into these markets can
be explained clearly using information asym-
metry and monitoring costs.
Many of the economies to which the above
examples refer vary from the home market in
 International retail franchising: an agency theory perspective
Anne Marie Doherty and Barry Quinn
terms of economic development, cultural
practices, retail regulation and so on. Given
that markets for this information are
imperfect, significant information asymme-
tries arise between home and host country.
This is accentuated by the considerable
presence of intangible assets in the form of the
product brand, franchise brand and franchise
format, amongst others. Should the retailer
attempt to enter the market by, for example,
the acquisition or organic route, considerable
monitoring costs would be incurred due to
the risk of moral hazard resulting from the
presence of these intangible assets and the
aforementioned information asymmetry pro-
blem. In such instances, by adopting an entry
mode such as franchising, the information
asymmetry problem is overcome by having a
franchisee that understands the operating
conditions in the foreign country. Further-
more, the franchisor is placing much of the
financial risk of the venture on the franchisee
through fees and royalty payments. More
importantly, these fees and royalty payments
serve to reduce the potential for moral hazard.
Thus, agency theory can provide a fuller
explanation of the situation than the tradi-
tional psychic distance argument.
A valid question resulting from this hy-
pothesis pertains to whether or not agency
theory can explain international retail fran-
chising from one developed country to
another, where the information asymmetry
problem with regard to culture, operating
practices and so on, as outlined above, may
not be as acute. Given the current lack of
empirical evidence on the subject, it is
postulated here that the presence of signifi-
cant amounts of intangible assets in the retail
sector, and the monitoring costs inherent in
protecting these assets against moral hazard
and opportunism, may provide a sufficient
explanation for international retail franchising
in such a situation.
Types of franchising
Master/area franchising, joint venture fran-
chising, direct investment and direct
franchising, are the major forms of franchising
a firm can choose from when it decides to
enter a foreign market by the franchising
route. In the case of international retailing,
the dominant forms utilised are master/area
franchising and, to a lesser extent, joint
venture franchising, both of which can be
explained using agency theory.
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Master/area franchising agreements are
favoured by established retail franchisors such
as the Body Shop and the convenience store
retailer 7-Eleven, and ``new'' retail franchisors
such as Marks and Spencer, Knickerbox,
Storehouse and Next. With this agreement,
the franchisor grants the master franchisee the
right to subfranchise the franchisor's concept
to others within an exclusive territory, creat-
ing a tripartite franchise relationship. In terms
of agency theory, given the significant amount
of intangible assets involved, such an ar-
rangement overcomes potentially serious
information asymmetry problems such as
those which can arise from cultural and
language barriers, differences in local operat-
ing practices and so on. The local partner is
viewed not only as a source of finance for the
franchisor but also as a major source of
information. With regard to monitoring, the
local partner's vested interest in the financial
future of the franchise network and its ability
to significantly reduce a potentially serious
information asymmetry problem, mean that
the monitoring costs of master franchise
arrangements may not be as acute as they
would otherwise be if the franchisor was solely
responsible for monitoring the operations of
the entire franchise network. As a result, firms
such as the Body Shop can achieve significant
network spread without sacrificing any of the
resources bound up in intangible assets.
Joint venture franchise arrangements in-
volve the franchisor forming a partnership
with a foreign franchisee but unlike master or
area franchisee agreements there is no provi-
sion for subfranchising. In this case there is a
contractually bound arrangement between
two companies to exploit a specific business
opportunity. Joint venture franchises occur
more prevalently in situations where the
information asymmetry problem has been
quite acute, that is, where retailers are
internationalising to culturally diverse mar-
kets. For instance, Littlewoods, the UK
retailer, employed a joint venture with a local
company, Gostiny Dyvor, to develop retailing
sites in St Petersburg. Littlewoods provided
the capital and retail products while Gostiny
Dyvor had the sites and the local knowledge.
According to Cantwell (1996), the greater the
cultural differences between home and host
countries, the higher the costs of monitoring
employees. Agency theory, with its focus on
information asymmetry and moral hazard,
and the associated costs of monitoring,
 International retail franchising: an agency theory perspective
Anne Marie Doherty and Barry Quinn
provides a valid explanation for using fran-
chising in this instance. The information
asymmetry problem is obviously quite acute
between such diverse countries and the risk of
moral hazard and the consequent monitoring
costs potentially quite high. Joint venture
franchising provides a contractual way of
reducing the information asymmetry problem
with both firms benefiting from each other's
information and expertise. Because of the
franchise contract and royalty fees, the risk of
opportunism and the potential for moral
hazard is also reduced, reducing in turn
potentially high monitoring costs.
Operationalisation of franchise systems
According to Eroglu (1992) and Quinn
(1998a), once a company has chosen to
employ franchising as an entry mode, and the
decision has been made on the form the
franchise operation should take, the major
issues the firm is concerned with are uni-
formity of offering and quality control. A
fundamental consideration in both cases is
that of monitoring.
Uniformity of offering
Significantly, research has shown that inter-
national franchisors, operating in sectors
other than retailing, do not consider adapta-
tion of the franchise package to foreign
markets a major impediment to internationa-
lisation (Walker and Etzel, 1973; Hackett,
1976; Walker, 1989; Walker and Cross, 1989;
Swerdlow and Chasel, 1990; McIntyre et al.,
1991). While many firms may standardise
across the elements of the marketing mix
(Hackett, 1976; McIntyre et al., 1991), this is
not always the case. Likewise, aspects of a
firm's human resource and finance strategies
may change depending on the countries
entered, altering the franchising agreement
and uniformity of offering accordingly.
Furthermore, each country's legislative re-
quirements may effect a necessary change in
the type of agreement used and company
policy regarding franchisee fees and royalty
payments. Anecdotal evidence from the retail
sector indicates that adaptation of the fran-
chise package beyond the core offering takes
place. For example, Marks and Spencer
works closely with its franchisees to choose
the most appropriate merchandise for each
country, and how best to display it (Marks
and Spencer, 1997). The Body Shop will
adapt its pricing policy to suit the market in
231
International Journal of Retail & Distribution Management
Volume 27 . Number 6 . 1999 . 224±236
question, for instance, higher prices are
displayed in France, because otherwise the
discerning French public will perceive the
shop's bodycare products as inferior, whereas
lower prices are displayed in Mexico so that
customers can afford the products (Helfferich
and Hinfelaar, 1995). Benetton overcomes
the issue of differing consumer demands in
specific international markets by producing a
standard product range, within which inter-
national franchisees have the choice as to
which products from the large range are most
likely to appeal to consumer tastes in their
specific markets (White, 1995).
In terms of agency theory, the degree to
which adaptation of the various company
strategies occurs in the different foreign
markets entered is contingent on the serious-
ness of the information asymmetry problem
and the potential for moral hazard. While
research evidence is scant with regard to
standardisation/adaptation and the interna-
tional retail franchise, it may be hypothesised
that the seriousness of the information asym-
metry problem will be even more acute within
this sector due to the higher degree of
intangible assets involved. If this were the case
then the potential for adaptation would be
higher. Hackett's (1976) findings would seem
to support this. He found that with regard to
product adaptation, product groups such as
soft drink, business services, and automotive
services predominantly used a standardised
approach while retail companies were more
likely to use an adaptation strategy.
Quality control
A major point of concern for international
franchisors is the issue of control over fran-
chisees (Walker, 1989; Walker and Cross,
1989; Swerdlow and Chasel, 1990). It seems
reasonable to assume that the head franchise
company will relinquish some degree of
control when internationalising its operations,
regardless of the type of franchise agreement
employed to enter foreign markets. With
master/area franchising or joint venture fran-
chising a high degree of responsibility for the
local market operations is transferred to the
master franchisee or business partner. Addi-
tionally, when the franchisor deals directly
with the local market franchisees themselves,
the difficulties in managing such operations
from a distance, especially once the number of
franchisees increases, inevitably leads to
further control loss. Theoretically, agency
 International retail franchising: an agency theory perspective
Anne Marie Doherty and Barry Quinn
theory would posit that this potential for the
loss of control is provided for in the franchise
contract through fees and royalty payments,
the aim of which is to decrease potentially high
monitoring costs. In sectors such as retailing,
however, where significant amounts of intan-
gible assets exist and are accentuated even
further in international markets, such costs
would be even higher. Nonetheless, while the
franchise contract is in place to maintain
control, standards in practice may prove
difficult to maintain. Body Shop, Benetton,
Sock Shop, Tie Rack and Wimpy are exam-
ples of retailers who have had ``problems'' with
their franchisees, with the latter terminating
contracts of some franchisees due to slipping
standards (Churchill, 1991). Furthermore,
this may also point to a situation where agency
theory may only partly explain franchising in
international markets, that is, it is relatively
unable to explain direct investment and direct
franchising. Internalisation theory, with its
emphasis on the internalisation of transaction
costs, can provide a valid theoretical explana-
tion in both instances (see Doherty, 1998).
Power relationships
The issue of power, and its location within the
franchise relationship, has been a major point
of interest in the broader franchising domain.
As this topic has not been investigated to any
real extent in the international franchising
literature, it can only be speculated upon as to
how it may affect international retail fran-
chising. In behavioural terms, according to
Quinn (1998a), there is a general consensus
in the literature that the exercise of coercive
power by a channel leader, for example, the
franchisor, on another member is likely to
decrease satisfaction of the latter while the use
of non coercive power will increase satisfac-
tion. How this manifests itself within the
international retail franchise operation re-
mains to be seen.
International retailing necessitates a greater
need for the control and power base to rest with
the franchisor due to the risk of opportunism
and moral hazard as a result of the existence of
the significant amounts of intangible assets and
the potentially high information asymmetry
problem that is characteristic of the sector. Of
the types of franchise agreement that can be
chosen, master/area franchising and joint
venture franchising offer the retailer the greater
amount of control and power. Coupled with
the appropriate type of franchise agreement
232
International Journal of Retail & Distribution Management
Volume 27 . Number 6 . 1999 . 224±236
should be a stringently enforced franchise
contract to protect the sector specific intangi-
ble assets.
Conclusion
In this paper it has been shown that, in the
light of increasingly mature domestic markets
and an expanding global marketplace, retail
companies' use of the franchise mode of
expansion to penetrate foreign markets con-
tinues with added momentum. By employing
agency theory, the paper represents an ex-
ploratory attempt to provide an explanation of
key elements of international retail franchise
activity. Agency theory by no means provides
a full explanation of all aspects of such activity
but neither was such an ambitious project the
intention of this work. Nonetheless, in intro-
ducing agency theory to international retailing
research, the paper has provided some initial
explanations for the phenomenon known as
international retail franchising. Hitherto, no
such conceptual or theoretical explanation
has been attempted in the relevant literature.
Given the rising popularity of the franchise
mode of expansion, such an attempt to
explain the use of this entry mode has value
for business practitioners and public policy
makers. By utilising agency theory it was
shown why franchising is a preferred entry
strategy to internationally diverse economies
for many retail companies. Discussion on the
direction of expansion was followed by an
appraisal of the key types of franchise agree-
ment open to retail companies contemplating
international development and recommenda-
tions were made regarding the types that
afford the retailer the greatest levels of
control. Practising managers may also note
the adaptations that need to be made to the
franchise package and the particular require-
ments facing retail companies' overseas
expansion.
While this paper sets out some original
theoretical premises, empirical research on
various aspects of the international retail
franchise process and the operationalisation
of the system will undoubtedly prove very
fruitful. Previous research studies into inter-
national franchising have largely undertaken a
postal survey methodology and employed
quantitative techniques. More recently, sev-
eral authors have used qualitative methods
such as ethnography (Quinn, 1998b) and the
 International retail franchising: an agency theory perspective
Anne Marie Doherty and Barry Quinn
in-depth case study approach (Sparks, 1995).
Further qualitative studies are more likely to
provide the depth of insight into actual
company operations which has hitherto been
missing from the literature. The findings to
emerge from such studies can offer potentially
valuable insights for practising managers.
Future empirical work may address several
key areas worthy of further research.
Firstly, a longitudinal study outlining the
international retail franchise process over time
should show whether agency theory plays a
major explanatory role in the long-term.
Additionally, the ability of agency theory to
explain international retailers' use of fran-
chising at different points in their
internationalisation process should also prove
interesting. A central question would pertain
to whether retailers use franchising as an entry
mode early in the international process when
information asymmetry would be deemed to
be high, as opposed to later when they have
gained experience of operating overseas thus
diminishing the information asymmetry pro-
blem. It is anticipated that this hypothesis is
very much an oversimplification of a complex
process.
Secondly, the current lack of empirical
evidence concerning the degree of adaptation/
standardisation within international retail
franchising indicates another rich source for
future research. In terms of agency theory, the
degree to which adaptation of the various
company strategies occurs in the different
foreign markets entered would be contingent
on the seriousness of the information asym-
metry problem and the potential for moral
hazard. Further empirical research should be
undertaken to explore this hypothesis.
Thirdly, with regard to the franchise con-
tract, an additional issue of interest refers to
whether or not international retailers, in
practice, enforce stricter contracts than firms
operating in the international manufacturing
sector. Agency theory's focus on intangible
assets would imply that stricter contracting
should be the norm in retailing as opposed to
the less intangible asset intensive manufac-
turing sector.
Fourthly, whether the use of coercive power
in the international retail franchise context
produces the same level of dissatisfaction
evidenced in the general domestic franchising
literature remains to be seen. The impact of
efficient support mechanisms and effective
channels of communication on the interna-
233
International Journal of Retail & Distribution Management
Volume 27 . Number 6 . 1999 . 224±236
tional retail process and system, and agency
theory's ability to explain this, indicates a
further avenue for research.
Finally, while agency theory provides a
useful starting point for attempts at explaining
international retail franchising, future studies
may apply other economics based theories,
such as resource allocation and internalisation
theories, to areas where franchising does not
appear to fit neatly into the agency perspec-
tive. For instance, while agency theory can
explain major aspects of master/area fran-
chising and joint venture franchising, the
most prevalent forms of international retail
franchising, internalisation theory may offer a
better explanation of certain forms of inter-
national retail franchising, such as direct
franchising and direct investment. Further-
more, the introduction of stewardship theory
to management research (Fox and Hamilton,
1994; Davis et al., 1997; Muth and Donald-
son, 1998), a concept still in its relative
infancy, may have future research potential in
this area.
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