Management contracts and franchising: a two-study examination of non-equity entry mode choice in the hotel sector

This thesis examines the non-equity entry mode decisions of international hotel organisations. To date, relatively few studies have examined entry mode choice in the context of the service sector as compared with that of the manufacturing sector, and fewer still have considered it in the context of the hotel industry. Moreover, studies focused on the choice between equity and non-equity entry modes by far outnumber studies focused on the choice between different non-equity modes. This gap needs to be filled because the majority of the entry modes used in the international hotel industry are non-equity in nature. This thesis presents empirical research based on the theoretical foundation of new institutional economics on the choice between non-equity entry modes in the hotel industry – specifically on the choice between franchising and management contracts, known as asset-light modes by practitioners. Moreover, to the knowledge of the author, this is the first thesis to gather both qualitative and quantitative primary data from hotel executives who are at the strategic level as opposed to from hotel general managers or other operational-level employees in the hotel industry. This thesis comprises two studies, each with its own literature review. Study 1 is qualitative in nature, with in-depth semi-structured interviews conducted with eight hotel executives. The primary objective of this study was to empirically examine which of the predominant theories of new institutional economics are the most appropriate for examining the specific choice between franchising and management contracts when internationalising a hotel or hotel chain. Transaction cost economics and the resource- based view emerged as the most appropriate theories, according to the executives interviewed. Specifically, the executives suggested that the considerations of asset specificity from transaction cost economics and imperfect imitability from the resource- based view are important in the decision. Moreover, several other considerations were suggested, including the size of the organisation, the importance of intangible assets and the level of investment into these assets. Finally, host country factors, such as legal and political risk, as well as the availability of capable local partners, were suggested as important considerations. Study 2 is quantitative in nature, with a self-selected dual scenario-based online survey (a franchise scenario and a management contract scenario) of 109 hotel executives. The primary objective of this study was to develop and test hypotheses through the combined theoretical lenses of transaction cost economics and the resource-based view as well as the findings from Study 1. These hypotheses were tested by initially examining whether the two groups of respondents differ in their opinion of the importance they attached to the independent variables in their entry mode decision through analyses of variance (ANOVAs) and a multivariate analysis of variance (MANOVA). This was followed by a discriminant function analysis to see if the variables allowed the prediction of group membership. These analyses were chosen because of their complementary and inter- confirmatory nature. The findings show that intangible assets and resources are one of the most important considerations in deciding between franchising and management contracts when internationalising a hotel or hotel chain, and that they prompt management contracts. Moreover, it was also found that uncertainties in the host market may lead hotel executives to choose franchising over management contracts, and finally, that asset specificity may prompt the use of management contracts over franchising