This is the presentation file I created for an HTM 681 class discussion. The contents are based on an Li-Tzang (Jane) Hsu and SooCheong (Shawn) Jang's article, Effects of Restaurant Franchising: Does an optimal franchise proportion exist? in International Journal of Hospitality Management Volume 28, Issue 2, June 2009, Pages 204-211.

1. Effects of Restaurant Franchising: Does an optimal franchise proportion exist? January 22 Suh-hee Choi HTM 681 2nd Article Spring 2009 Hsu, L.,& Jang, S. (in press)

2. Spinelli et al., 2003; Aliouche and Schlentrich, 2005 Research Questions Alon et al., 2004 Does franchise influence a restaurant firm’s performance? franchise Vs. non-franchise profitability intangible value Research based on the empirical evidence Does optimal franchise proportion exist? • reduces investment cost / risk • disadvantages Other things being equal Bradach, 1997 “marginal costs = marginal benefits” Organizational learning theory (Sorenson & Sorenson, 2001) Resource scarcity theory (Hunt, 1973; Norton, 1988; Oxenfeldt & Thompson, 1968, Oxenfeldt & Kelly, 1969) Theories Agency theory (Rubin, 1978)

3. Methodology

6. Methodology Dependent variables ROA ROE Tobin’s Q

7. Methodology (cont.) Independent variables franchise proportion Controlled variables leverage firm size (economy of scale) advertising profitability (in Tobin’s Q model)

8. Methodology T-test compare the means between franchise / non-franchise ROA(ROE, Tobin’s Q Regression analysis

9. Methodology Regression analysis • normality  natural log transformation • multicollinearity • heteroskedasticity

10. Resultsdescriptive information

11. Results franchise vs. non-franchise profitability and intangible values are significantly higher in franchise firms than non-franchise firms

12. Results franchise vs. non-franchise H1: Franchise restaurant firms have higher profitability and create more intangible value than non-franchise restaurant firms.

13. Results effects of franchise proportion H2: There is non-linear relationship between franchise proportion and profitability and intangible value.

14. Results effects of franchise proportion maximum ROA (ROE, Tobin’s Q)? shaped

17. Conclusions Franchising betters financial performance / intangible value. Optimal proportions of franchising can be found (to maximize financial performance / intangible value). other factors of optimal proportions might be significant : geographical dispersion was tested.

18. limitations Didn’t include positioning and marketing concepts. Focused only on restaurant industry. Limited data available (what about small franchisors?)

19. Further studies Develop methodologies to find optimal points that consider both maximizing profits and reducing risks at the same time (e.g. Agency Theory (Rubin, 1978)) What happens if OTHER THINGS ARE NOT EQUAL? Other benefits of franchising? social values sustainable relationships between the firms

20. appendix: White's test Assumption: V(ui) = s 2 + g(E(Yi))2 i.e. the variance of u depends on the expected value of Y (and hence on at least one of the x variables).  V(ui) = s2 + g(b1 + b2x2 + ... + bkxk)2 H0: g = 0  homoscedasticity otherwise heteroscedasticity. Regress e2 on x22, x32, etc and x2x3, x3x4, etc. Obtain nR2 ~ c2(k-1) as an LM statistic. www.sussex.ac.uk/economics/documents/lecture_4.ppt