Franchising, brand name capital, and the entrepreneurial capacity problem

Abstract

One consequence of vertical integration is increased firm size with the related problem of monitoring employees in a large enterprise. Writers on the theory of the firm suggest that this phenomenon is part of the entrepreneurial capacity problem. This paper argues that quasi-vertical integration via franchising can circumvent the problem and lead to larger-scale retail outlets. Using U.S. Census data from the eating place and motel industries, the empirical evidence in this paper suggests that physical dispersion of outlets and the value of brand name capital increase the entrepreneurial capacity problem, but that franchising offsets these forces and permits somewhat larger local outlets than using nonfranchised operations.