Overestimation and Venture Survival: An Empirical Analysis of Development Commitments in International Master Franchising Ventures

Authors


  • The author thanks Juan Alcacer, Wilbur Chung, Iain Cockburn, Ricard Gil, Benjamin Gomes-Casseres, Mark Kennedy, Peter Kim, Kevin J. Murphy, Jennifer Overbeck, Joanne Oxley, Rachelle Sampson, Kenneth Train, Michele Williams, Leslie Williams, Bernard Yeung, and Xiaoli Yin for making helpful suggestions. The author also thanks seminar participants at the Massachusetts Institute of Technology, Purdue University, the University of Southern California, the University of Washington, the 2003 Academy of International Business Annual Meetings, the 2004 International Industrial Organization Conference, the 2004 Strategy Research Forum, and the NBER “Productivity Lunch” Seminar Series.

Abstract

Many international master franchising contracts include “development commitments,” clauses specifying a number of units that master franchisees must develop in exchange for exclusive rights to an assigned market, typically their entire home nation. I analyze 142 contracts with development commitments signed by US fast food franchisors and their master franchisees. Several empirical regularities emerge from the analysis: First, the development commitments are large and rarely completely fulfilled. Second, a robust negative relationship exists between survival and development commitment size. Further, ventures with larger commitments exhibit a lower level of investment still productive at the end of the development period. Various explanations for these regularities are considered.

Ancillary