International Journal of Hospitality Management 31 (2012) 379–386
Contents lists available at ScienceDirect
International Journal of Hospitality Management
journal homepage: www.elsevier.com/locate/ijhosman
Examining the determinants of hotel chain expansion
through international franchising
Ilan Alon a , Liqiang Ni b , Youcheng Wang c,∗
a
b
c
Rollins College, 1000 Holt Ave – 2722, Winter Park, FL 32789, United States
Department of Statistics, University of Central Florida, Orlando, FL 32816-2370, United States
Rosen College of Hospitality Management, University of Central Florida, 9907 Universal Blvd, Orlando, FL 32819, United States
a r t i c l e
i n f o
Keywords:
Franchising
Internationalization
Hotel industry
Hospitality
Bayesian data analysis
a b s t r a c t
This study proposes and tests an agency-based organizational model of internationalization through
franchising in the hotel sector. Using data obtained from a Franchisor Questionnaire 2001–2008, we
analyzed a panel of 117 observations of 17 U.S.-based hotels. Our analysis reveals that a hotel franchisor’s
decision to internationalize through franchising is positively related to the percentage of franchises, the
ratio of franchised units to the total number of units. The article contributes to the literature by empirically
modeling international franchising of hotels, which present unique characteristics among franchising
companies, with a high investment capital requirement, maturity in the product life cycle, and a high
level of standardization and globalization of operations. The unique characteristics of individual chains
and their segment in the industry are particularly important, as revealed by both data analysis and expert
opinion.
© 2011 Elsevier Ltd. All rights reserved.
1. Introduction
In the U.S. economy the service sector has undergone tremendous growth in the past several decades, with the hospitality
industry one of the major contributors to this fast-paced growth
(Ketchen et al., 2006). Unlike most other service sectors, the hotel
industry is generally capital-intensive and its logistics and supply chain can be as complex as those in manufacturing operations
(Chen and Dimou, 2005). For hotel companies, this can be a big
obstacle to an equity-based expansion model in various markets,
particularly in the international market. Thus, it raises the issue of
the importance of the internationalization process through franchising as a non-equity-based expansion strategy.
Franchising provides scope for rapid international expansion
for hotel companies and has the potential to overcome many of
the cultural, linguistic, technical, legal, and employment problems
commonly associated with internationalization (Abell, 1990). Hotel
chains prefer to use non-equity forms of organization for international expansion and operations mainly due to cost-efficiency
concerns. Non-equity-based agreements, such as franchising, are
the most common forms of organizational structure for market
entry (Contractor and Kundu, 1998) among hotel and motel chains,
partly because setting up a hotel requires a large amount of capital.
∗ Corresponding author.
E-mail addresses: ialon@rollins.edu (I. Alon), lni@mail.ucf.edu (L. Ni),
raywang@mail.ucf.edu (Y. Wang).
0278-4319/$ – see front matter © 2011 Elsevier Ltd. All rights reserved.
doi:10.1016/j.ijhm.2011.06.009
In other words, the hotel and motel industry is capital-intensive,
requiring a big financial up-front outlay to establish facilities. Franchising provides an opportunity for hotels to lower the risks and
the level of investment to expand. Franchising also allows hotel
and motel franchisors to share the costs of expansion with the
franchisees, who typically pay the start-up costs, initial fees, and
ongoing royalties. In return, the franchisees obtain brand-name
recognition, economies of scale, and managerial expertise from
the franchisors. Contractor and Kundu (1998) propose that a competitive advantage can be derived by separating knowledge-based
expertise from capital ownership. A franchise is a way to transfer
tangible and intangible expertise with limited capital risks.
The hotel industry, in particular, is different among other service franchisors, justifying a separate examination. Using chow
tests to compare organizational determinants of internationalization, Alon (1999) found that hotels are significantly different from
retail and business services franchises’ internationalization. Franchising related costs are highest in terms of the required capital
investment for hotels. Total investment required by Choice Hotels
International ranges from $2.3 to 14.6 million, InterContinental
Hotels Group (IHG) $2–20 million, Motel 6, $1.9–2.3 million, and
Hilton 53.4–90.1 million, to give a few examples.1 In contrast,
most other service franchising industries require less than $1 million for start-up costs. The high capital requirement raises the
risk of international investment and the needed bonding between
1
Retrieved from http://worldfranchising.com/industry/Lodging/ (June 2, 2011).
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I. Alon et al. / International Journal of Hospitality Management 31 (2012) 379–386
franchisee and franchisor inherent in the agency relationship.
Hotels have decoupled the ownership of property from the ownership of intellectual assets and have extensively used non-equity
modes of entry internationally to defray expansion with minimum
risk.
However, internationalization through franchising can be a
complex process affected by many forces, particularly organizational factors and market conditions. Although previous research
has examined factors contributing to internationalization through
franchising as an entry mode in the manufacturing industry (e.g.,
Baker and Dant, 2008; Gatignon and Anderson, 1988) and among
fast food and service franchisors (e.g., Ni and Alon, 2010), this study
narrows the research gap by explaining the internationalization
of franchising systems in the hotel industry by both empirically
testing a theory-driven model and corroborating the model with
in-depth interviews of industry practitioners. In particular, this
study attempts to identify and understand the impacts of organizational factors and market-condition variables on the decision of
hotel companies to enter international markets through franchising
within a framework of agency-based theory.
This study uses Burton and Cross’ (1995) definition of international franchising. They define international franchising as “a
foreign market entry mode that involves a relationship between
the entrant (the franchisor) and a host country entity, in which the
former transfers, under contract, a business package (or format),
which it developed and owns, to the latter” (p. 36). This definition is suitable because our study does not differentiate between
the various modes of international franchising. It focuses on the
decision to internationalize through franchising, regardless of the
mode of entry. In other words, franchising is a business relationship
whereby a franchisor permits a franchisee to use its brand name,
product, or business system in a specified and ongoing manner in
return for a fee (Felstead, 1993). This method is commonly distinguished from other international market entry modes, such as
leasing agreements or management contracts that are not included
in the current study.
2. Theoretical background
The internationalization of hotel and motel chains started in
the 1950s and 1960s with firms such as Hilton, Sheraton, Holiday
Inn, Marriott, and Ramada Inn. Modern-day hotel franchising as
an internationalization strategy can be traced back to the 1950s
when Holiday Inn established itself as the primary franchisor in
the business (Shook and Shook, 1993). In the North American context, hotel companies relied largely on leasing arrangements and
management contracts as an internationalization strategy until the
1980s, when franchising was adopted as one of the mainstream
means for international expansion. These methods reduced the
investment risks associated with the internationalization of highly
capital-intensive hotels and, in addition, allowed direct management control in countries with lower levels of management and
staff expertise (Cho, 2004).
Franchising systems in the hotel industry are among the most
mature of the franchised services, therefore, they are further
along the product life cycle. They also face stiffer domestic and
global competition and declining profit margins, which together
contribute to a greater awareness of the need to think of the
world in global terms (Huszagh et al., 1992). In fact, non-equity
organizational forms are becoming the norm among franchising
systems across the hotel industry (Baker and Dant, 2008; Bradach,
1997; Perrigot, 2006). That is, franchising hotel companies can
use franchised outlets and various master and area development
agreements at the same time in the same or different markets. In
recent years, multi-unit franchising has become a popular method
to expand, particularly in international hotel markets (Altinay and
Altinay, 2003; Cho, 2005).
A review of the literature indicates that the growth of the hotel
franchise sector through international franchising in various international markets is based on the following organizational and
market-condition factors: (1) level of domestic saturation, (2) competition in the home market, (3) potential in emerging countries,
in particular in Asia and Latin America, (4) regional trade agreements, such as the European Union and the North American Free
Trade Agreement, and (5) liberalization of the formerly Communist
countries (Johnson and Vanetti, 2005; Kostecka et al., 1969–1988;
Lashley and Morrison, 2000; Tucker and Sundberg, 1988). American hotel companies tend to use franchising as a business strategy
to expand their brand (sometimes globally) in order to keeps risks
to a minimum (Dunning et al., 2007).
Using the literature on the competitive theory of the firm,
Huszagh et al. (1992) find that time in operation (age), number
of units (size), and, to a lesser extent, equity capital and the location of headquarters are significant factors differentiating domestic
from international franchisors. Shane (1996) builds on Huszagh
et al.’s research to concentrate on the agency costs associated with
internationalization. His findings reveal that the price structure of
franchises, together with the monitoring capabilities, contribute
to internationalization. Eroglu (1992) has developed a conceptual
model of internationalization which uses organizational determinants, such as firm size, operating experience, as well as top
management’s international orientation, tolerance of risk, and perception of competitive advantage.
Fladmoe-Lindquist (1996) build on the aforementioned
research to develop a conceptual framework of international
franchising based on resource-based and agency theories. He
does not test his model since it has a normative or managerial
orientation. But Alon and McKee (1999a) tested a model combining
resource-based and agency variables in the professional business
service industry and found only size to be a significant variable
influencing franchisors’ decision to internationalize. The number
of outlets a franchisor has is among the most common predictors
of internationalization. Alon (1999) suggests that the effect of
resources and monitoring skills (often measured as the number of
outlets) on internationalization is common across industries, but
its impact may be industry-specific.
The internationalization of hospitality firms and hotel chains is
multi-dimensional. Using a single embedded case study, Altinay
(2007) shows that the internationalization of hospitality firms is
often based on shareholder pressure, the desire to extend the core
competencies of the firm, and demand by international customers.
Contractor and Kundu (1998) suggest that reservation systems and
hotel brands allow a franchise to thrive in foreign markets because
they act as barriers against partner opportunism.
Much of the research on international franchising in the hotel
sector focuses on explanations of modal choices. Pine et al. (2000),
for example, suggest that cultural distance between the host and
the home market of the firm favors a non-equity mode of entry,
such as franchising and management contracts. Hotels, particularly high-end hotels, generally prefer non-equity-based modes of
expansion, such as management contracts or franchising arrangements. The rationale behind this preference is not only because of
the large financial outlays but also because of the inefficient use of
land in the latter. In other words, the return on investment from
their brand and management expertise is far higher than on land
and buildings, and investments in the latter may create a drag on
overall performance. However, quality concerns may favor the use
of owned properties (Contractor and Kundu, 1998). Although the
debate on the exact specification of entry mode is ongoing, our
focus here is on the decision of franchise hotels to go global through
franchising within the framework of agency-based theory.
I. Alon et al. / International Journal of Hospitality Management 31 (2012) 379–386
2.1. Agency theory and price bonding
Agency theory is a dominant paradigm to explain franchising,
particularly in the United States (Baker and Dant, 2008). The theory
suggests that an agency relationship exists between a franchisor
(the principal) and the franchisee (the agent). Since the parties
may have divergent goals, agency costs arise along with the risk of
opportunism. Principals can reduce agency costs and opportunism
through direct observation and monitoring or through a system
of aligned incentives (Eisenhardt, 1989; Jensen and Meckling,
1976).
Rubin (1978) applied agency theory to explain franchising relationships. Franchising reduces monitoring needs by aligning the
incentives of the agent (franchisee) and the principal (the franchisor) by making the franchisee a residual claimant on revenue.
Thus, in the hotel industry franchising is a substitute for direct
observation when monitoring costs are high or when distance separates the principal from the agent (Fladmoe-Lindquist and Jacque,
1995; Norton, 1988). However, hotel franchising has its own set
of monitoring needs. For example, intangible assets may be appropriated without monitoring, income can be misreported without
auditing, and quality can deteriorate in the absence of controls.
Monitoring skills are a key to successful franchising, especially if
crossing borders, cultures, or marketing environments in which
other direct control mechanisms are compromised.
Some agency explanations of the internationalization of franchising systems using agency theory were originally developed by
Shane (1996). To minimize agency costs, franchisors charge their
international franchisees higher initial fees in relation to royalties,
in comparison to what they charge their domestic counterparts.
This pricing structure creates high bonding between the franchisor
and the international franchisee since the international franchisee
has more at stake. The initial fee the franchisee pays constitutes
about one-half of the total investment, often representing a major
portion of the franchisee’s wealth. The cost of termination is higher
because the franchisee will lose the initial fee if he/she does not follow the strict format of the franchisor. Therefore, it is hypothesized
that
H1. The greater the price bonding the hotel franchisor stipulates in
its contracts, the more likely it will seek international franchisees.
2.2. Franchisor geographical dispersion and franchisee
monitoring skills
Opportunistic behavior by franchisees may also be controlled
through effective monitoring (Fladmoe-Lindquist, 1996). Hotel
franchisors’ monitoring skills are in increasing demand as they
cross borders. New risks are introduced by the changing environment, different factors for success, and the local socio-economic
and political environments. Because monitoring skills are not
directly observable, in past research various proxies have been
used. Shane (1996) finds that monitoring, measured as a multiplicative composite index consisting of the number of franchised
units, the percentage of franchised outlets, and the age of the franchise system, is positively related to the internationalization of
franchising. Elango (2007) captures monitoring skills through the
experiences of franchisors, namely, the percentage of franchised
units and the number of years of the franchise. Hotel franchisors
that have franchised for a while and have achieved a high degree
of franchise ownership in their system are also more likely to possess the monitoring skills required to succeed across heterogeneous
locations.
Hotel franchisors with dispersed units are more likely to seek
international franchisees since they are used to operating at arm’s
length in distant locations, which are subject to slightly different
381
conditions. Franchisors with many franchisees in heterogeneous
locations across the United States are better poised to take advantage of economies of scale in promotion and monitoring because
such locations incorporate differing levels of return and risk
(Huszagh et al., 1992).
H2a. The greater the domestic geographical scope of the hotel
franchisor, the more likely it will seek international franchisees.
2.3. Does size matter? The scale effect
Size matters in franchising (Alon, 1999). It is oftentimes measured by the scale of operations or the number of outlets in the
system. It is usually assumed that a hotel franchisor must reach a
certain size before it can venture abroad. It must demonstrate that
it is successful in a variety of local environments before it is ready
to be tested in a global environment. Scale infers financial capital, brand-name recognition, managerial and routine-processing
know-how, and monitoring skills. It is risky to internationalize prematurely because international franchising systems in the hotel
industry often incur huge expenses long before they receive any
returns, even if the initial fee is low (Mendelsohn, 1999).
Fladmoe-Lindquist (1996) emphasizes the need for distance,
and cultural and host country management skills for successful
internationalization. As the franchising hotel grows, it develops
additional franchised units, which allow it to acquire resources necessary for overseas expansion. As such, the franchising hotel’s scale
(measured in terms of the number of domestic outlets) may be decisive. If domestic opportunities are high and the franchisor has not
saturated its market, then additional domestic franchises can be
built and the opportunity cost of seeking more distant, risky locations may be less attractive. In short, the number of outlets in the
hotel franchisor’s domestic system should positively influence the
franchisor’s decision to internationalize. The larger the franchising
hotel company, the greater the economies of scale (Huszagh et al.,
1992), financial capital, brand-name recognition (Aydin and Kacker,
1990), market power (Huszagh et al., 1992), and market saturation
(Shane, 1996). The more outlets there are in the hotel franchisor’s
system, the more likely it is that the franchisor can lower operating
costs per outlet. There are also economies of scale in purchasing,
promotion, R&D, monitoring, and quality controls. Some services,
such as advertising, product development, and reservations, can
be centralized, adding to the cost savings and to consistency in
marketing.
Finding international franchisees should also be easier for big
hotel franchisors because of brand-name recognition (Aydin and
Kacker, 1990). The overseas expansion success of McDonald’s was
partly a result of its highly recognized brand name. McDonald’s
has the second most recognized trade mark in the world, following
only Coca-Cola (Fullerton et al., 2007). It is also easier for large hotel
franchisors to raise capital in foreign markets due to their market
power and perceived credibility (Huszagh et al., 1992). In addition,
there is a greater possibility that the bigger the franchisor, the more
likely it will saturate the domestic market (Shane, 1996). Thus,
hotel international franchising can be seen as an avenue for growth
due to limited opportunities in the home market. From the above
discussion we can postulate the following interrelated hypotheses tied to the ability of franchisors to monitor international
franchisees.
H2b and H2c. The bigger (number of outlets) and older the hotel
franchisor, the more likely it will seek international franchisees.
2.4. Franchising as a strategic model for expansion
Franchising is an organizational competence that leads to competitive advantage. Franchising companies are able to leverage
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I. Alon et al. / International Journal of Hospitality Management 31 (2012) 379–386
their know-how and reduce the resource commitment to maximize returns and minimize risks. Ni and Alon (2010) found that
fast-food franchisors that used more franchising in their system
expansion were more likely to internationalize. More specifically,
those who sought international franchisees via multi-unit franchisees, sub-franchisees or area franchises, were more likely to go
global.
The expansion of franchisors into emerging and developing markets has also corresponded with the increased use of multi-unit
franchising as a way to minimize risk and expand rapidly at the
same time. The span of control is also smaller when multiple units
report through a master or area franchisee, thus, making it simpler for the franchisor to manage multiple locations around the
world, each with its own institutional environment. Various forms
of ownership and franchising have been well documented in the
franchising and hotel management literature (e.g., Vianelli and
Alon, 2007). Garg and Rasheed (2006) suggest that (1) multi-unit
franchising is growing in popularity in the international context
where geographic and cultural distances exist, and that (2) agency
theoretic explanations are especially well suited to explain this
growth. Multi-unit franchising is different from single-unit franchising in that the franchisees own, operate, and control more than
one unit (Kaufmann and Dant, 1996). There are several permutations of multi-unit franchising: (1) franchisors can allow area
development agreements which give the franchisee a defined territory in which they can develop units, (2) franchisors can choose
to use sub-franchising contracts (often called master franchising)
that allow the franchisee to be both the agent to the franchisor
and the principal to others (sub-franchisees), and/or (3) franchisors
can allow franchisees to establish additional units in a given territory (consecutive franchising). The use of multi-unit franchising has
been shown to contribute to system growth (Kaufmann and Dant,
1996).
Multi-unit franchising reduces agency costs (including shirking,
adverse selection, inefficient risk-bearing, free-riding, and quasirent appropriations) and promotes internationalization (Garg and
Rasheed, 2006). First, shirking is reduced at the sub-system level
because multi-unit franchisees detect cheating in their local contexts. They are able to compare same-store sales in a given
geographical context and are delegated the monitoring needs of the
franchisor. Second, since a multi-unit franchisee, usually in charge
of the area in which he/she resides, can collect more relevant local
information. Multi-unit franchisees can reduce the cost of adverse
selection because of their closeness, both geographic and cultural,
to operations, recruiting, screening, training and monitoring. Third,
the flow of information is increased because multi-unit franchisees
often reside in proximity to sub-franchisees. This geographical
proximity contributes to knowledge of local market conditions
and allows more and better monitoring so that appropriate and
timely adjustments can be applied if necessary. Fourth, inefficient
risk bearing is reduced because multi-unit franchisees put a large
sum of their assets in the venture, and they are the owners of a
more diversified portfolio spreading fixed costs against a greater
number of outlets. Fifth, since the brand-name capital is better
captured over a greater number of units, the problems associated
with free riding are minimized. Lastly, quasi-rent appropriations
are reduced because multi-unit franchisees can earn acceptable
returns on investment in the chain.
H3. The greater the proportion of franchising in the hotel
franchisor’s system, the more likely it will seek international franchisees.
H4.
Hotel companies that use area development or subfranchisees contracts to expand are more likely to seek international franchisees.
Table 1
The hypotheses, variables, and definitions.
Hypothesis
Variable
Relation
Definition
H1
FRratio
Positive
H2a
Disper
Positive
H2b
Fexp
Positive
H2c
H3
USscale
FranPer
Positive
Positive
H4
Multi
Positive
The ratio of franchising fee over
royalty rate ($k/percentage).
The number of US states where the
company has a presence.
The number of years the company
has been franchising.
The number of US units.
The percentage of franchised units
among total number of units.
The indicator 0, 1, or 2 whether
area development agreements
exists and additional outlets can be
added in a given territory.
3. Methodology
This study employs Bayesian logistic regression analysis to
examine the effect of the four hypotheses. Data were obtained from
the Franchisor Questionnaire 2001–2008, Bond’s Franchise Guide.
These data have been used by past researchers (e.g., Lafontaine,
1992). They are comparable to the data collected by Entrepreneur,
but they are more detailed and extensive. Using 7 independent variables (listed in Table 1) to measure the constructs, we
specified and tested an agency theoretic model of international
franchising with 117 observations for 17 U.S.-based hotels chains
(i.e., AmericInn, Best Inn, Candlewood, Country Inns, Doubletree,
Embassy, Hampton, Hawthorn, Hilton, Hilton Garden, Homewood,
Hospitality International, Microtel, Motel 6, Ramada, Red Roof, and
Studio 6), where each chain has at least 5 observations. Logistical regression is used because the decision to internationalize is
modeled as dichotomous (go/no go). The binary dependent variable IE (international expansion) indicates whether the company is
actively seeking franchisees overseas (beyond the United States and
Canada). The dependent variable was conceptualized as in previous research on international franchising (Alon and McKee, 1999a;
Eroglu, 1992; Shane, 1996).
Table 1 summarizes the predictive variables and their definition
and relationship to the hypotheses. In addition to the independent
variables in Table 1, we also use the minimum total investment in
million dollars (Invest) to take into account the capital-intensive
nature of the industry. Table 2 provides some descriptive statistics
of the variables and the Variance Inflation Factors (VIF). No serious multicollinearity issue is revealed with the largest VIF only
being 2.934. It should be recognized that one salient feature of
the data is the longitudinal nature of the observations. We expect
that the responses for the same company are correlated, which
suggests a company-specific random effect for each of the 17 companies. A mixed model, sometimes called a hierarchical model, is
well suited for analysis of longitudinal data (Pinheiro and Bates,
2000). For example, Lafontaine and Shaw (1999) investigate the
pattern of royalty rates using a mixed-effect linear model, with time
as the only fixed-effect variable, and a company-specific random
Table 2
Summary statistics of variables in data analysis.
IE
FRratio
Disper
Fexp
FranPer
USscale
Multi
Invest
Min
Max
Mean
SD
VIF
0.000
83.300
11.000
3.000
0.054
33.000
0.000
0.200
1.000
2500.000
50.000
41.000
1.000
1382.000
2.000
33.000
0.692
976.057
36.598
15.248
0.739
331.624
0.744
5.901
0.464
507.092
9.476
8.249
0.328
327.876
0.559
7.132
–
2.367
2.260
1.795
1.494
2.247
1.659
2.934
I. Alon et al. / International Journal of Hospitality Management 31 (2012) 379–386
383
Fig. 1. The ratio of ˛
ˆ k , k = 1, 2, . . . , 7 over its standard error with varying prior scale
parameter , where two horizontal dash lines indicate the 5% and 95% percentile of
standard normal, and the vertical line with = 1 corresponds to Table 3.
ˆ k , k = 1, 2, . . . , 17 over its standard error with varying prior
Fig. 2. The ratio of ˇ
scale parameter with two dash lines indicate the 5% and 95% percentile of standard
normal, and the vertical line with = 1 corresponds to Table 3.
component. However, in this study, with a relatively moderate
sample size of 117 data points, a traditional mixed-effect model
encounters numerical problems. A Bayesian approach can resolve
this issue (Carlin and Louis, 2000).
Let Yij be the binary response for the ith company’s jth observation, i = 1, . . ., 17 and 7. Define pij = PR(Yij = 1). The basic model is
for fitting a logistic regression. This approach is able to directly estimate the posterior mode (the estimate of the coefficient) and its
standard error, while it avoids the heavy MCMC machinery. In this
study, we adopt the algorithm used by Gelman et al. (2008).
log
pij
1 − pij
= ˛0 + ˇi + ˛1 × X1ij + ˛2 × X2ij + · · · + ˛8 × X7ij ,
where X1, . . ., X7 denote eight independent variables in Table 1,
ˇi denote a company-specific effect addressing the correlation
between multiple measurements for the same company.
We assign the normal distribution with mean zero and standard
deviation as a weakly informative prior distribution for the coefficients. The scale parameter is fixed at 10 for the intercept ˛0 . For
the other coefficients, we let the common be a value between 0.1
and 2.5. With varying we are able to see the impact of the prior on
the result. For example, we may plot z-score, one of the common
used statistics, for any coefficient against as in Figs. 1 and 2. The
sign and magnitude of these z-scores can be interesting to readers,
which provides a more complete and dynamic view of the influence
of a particular factor than snap shots usually seen in the literature as
in Table 3. By default we use a Monte Carlo Markov Chain (MCMC) to
obtain posterior distributions for the coefficients in a Bayesian data
analysis; however, this approach may not be numerically stable,
especially when the number of coefficients is relatively large. Most
recently, Gelman et al. (2008) proposed incorporating an approximate EM algorithm into the usual iteratively weighted least squares
Table 3
Excerpt of Bayesian logistic regression fitting with standard normal as the prior.
Best Inn
Candlewood
Ramada
FRratio
Disper
Fexp
FranPer
USscale
Multi
Invest
Coefficient
Std. error
z-Value
p-Value
−2.078
1.411
−1.287
0.000143
0.000915
0.0913
2.404
−0.00151
0.867
0.0298
0.740
0.775
0.806
0.000672
0.0366
0.0435
0.969
0.00101
0.581
0.0535
−2.807
1.822
−1.598
0.212
0.025
2.100
2.482
−1.490
1.494
0.558
0.005
0.069
0.110
0.832
0.980
0.0358
0.0131
0.136
0.135
0.577
3.1. Robustness of empirical outcomes
Data triangulation was then used to enhance the credibility
and external validity of the results of the quantitative data analysis. Triangulation is an approach to data analysis that synthesizes
data from multiple sources (Creswell, 2009). Triangulation seeks
to quickly examine existing data to strengthen interpretations and
improve practical implications based on additional available evidence. By examining information collected by different methods,
findings can be corroborated across data sources, reducing the
impact of potential biases that can exist in a single data set. One
approach of triangulation is to combine information from quantitative and qualitative studies by making use of expert judgment
(Yin, 2003).
Data triangulation was achieved in this study first by sharing
the data analysis results with three industry executives and then
by personal interviews to solicit their feedback and insights based
on their professional experience. All three informants have vast
work experience in the hotel industry and are knowledgeable about
internationalization and franchising strategies and practices, both
in the hotel industry in general and in the specific companies in
which they work in particular. Informant A is Executive Vice President of Global Brands, Hilton Hotels Corporation. Informant B is
Vice President of the Ritz Carlton Club, and Informant C is Executive
Vice President of Portfolio Management and Administration for CNL
Hotels & Resorts. The interview results from the three informants
have been integrated into the final section.
4. Results
Fig. 1 shows the curve of ˛
ˆ k /se(˛
ˆ k ), k = 1, 2, . . . , 7 with varying
scale parameter , which can be used to assess the significance of
the contributions from eight predictors. Fig. 2 shows the curve of
ˆ k /se(ˇ
ˆ k ), k = 1, 2, . . . , 17 with varying scale parameter , which
ˇ
can be used to assess the significance of 17 company-specific
effects. The prior distribution becomes flatter with an increasing ,
i.e., the influence of prior distribution is diminishing. As goes to
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I. Alon et al. / International Journal of Hospitality Management 31 (2012) 379–386
infinity, it converges stably to the classic logistic regression. Table 3
shows the result of the Bayesian logistic regression fit with = 1,
which provides an informative snapshot of the relative importance
of the variables as shown in Figs. 1 and 2. The franchising experience and the percentage of franchised units are important at a
5% significance level. The higher the percentages, the more likely
the company will seek international expansion. The number of
U.S. operating units and multi-franchising indicator have only a
marginal impact, with p-values around 0.10. All other predictors
are deemed unimportant.
Regarding the company-specific effects, only the 3 most interesting ones are listed in the Table, as suggested by Fig. 2. Taking the
other factors into account, Best Inn and Ramada are less enthusiastic about international franchising, whereas Candlewood is keen
to invest overseas through franchising.
Comparing our results with a similar study conducted on the
fast food restaurant (Ni and Alon, 2010), we find several differences
with the results obtained here from the lodging sector. In the fast
food, the price of the franchise fee in relation to the franchise royalties was positive and significant. This is hypothesized because such
pricing deters opportunism by raising the costs of a break up. In
our sample of hotels, the franchise price to royalty ratio is not a
good predictor. This is possibly because the start-up costs are high
and, in effect, may serve as a bonding agent by raising the costs
of exit. Also in the fast food industry, the use of area franchising
and, more so, sub-franchising also contributed to the internationalization of the industry (Ni and Alon, 2010). In the hotel industry,
multi-unit franchising does not contribute to internationalization
possibly because the number of outlets needed in a region is smaller
for hotels than fast food, or, said another way, the given territory per
franchisee can be larger. What is consistent between hotels and fast
food is that both have a strong positive relationship to franchising
percentage. That is, franchisors using franchising domestically are
more adapt to using it internationally for expansion. Franchising is
a resource-based capability that can lead to global competitiveness
and expansion.
5. Discussion and conclusions
Using the framework of agency theory, the current study
proposes and tests an agency-based organizational model of internationalization through franchising in the hotel sector. This study
contributes to the extant literature on international franchising
by examining empirically the hotel franchising sector. It also
tests other agency theoretic hypotheses linking franchising to
hotel internationalization. On the practical side, this work highlights franchising factors associated with hotel internationalization
through franchising and provides practical guidance as to when to
seek international hotel franchising. The results of the data analysis
support some of the proposed hypotheses; more importantly, several findings are especially interesting and intriguing. These will be
highlighted in the following section.
The study results indicate that franchise experience and the
franchise percentage are positively related to a hotel franchisor’s
decision to internationalize. By and large, this is consistent
with previous research which reveals that a lack of franchising
experience leads to high organizational uncertainty, making the
monitoring of performance both challenging and costly, and thus
hampering the internationalization endeavor. This international
experience is especially important for hotel companies since franchising in the hotel sector presupposes a heavy investment in sunk
costs in the process of developing the franchise package. It is also
possible that a hotel company with limited international experience may find it more difficult to attract and select qualified
franchisees. This finding was observed and supported by Informant
B stated that without an established franchising base, international franchising may present incremental hurdles in comparison
to domestic franchising. In contrast, with an established domestic
franchise base, the challenges of international franchising may be
diluted.
Related to the positive impact of franchise experience, past studies have suggested that hotel franchisors with strong franchising
monitoring skills are more likely to seek international franchisees.
Informants B and C both pointed out that although franchising can
be a strategy for expansion at specific times for hotel companies
possessing high monitoring skills, the “high degree of franchising”
may be more reflective of the brand strength, the company’s strategy, and the hotel operator’s needs at the time than the monitoring
skills. Often times, franchising is a way to expand the brand in areas
where it has not been able to expand on its own. Citing Marriott as
an example, Informant B stated that he did not believe that the
arm’s-length relationship and slightly different locations were the
drivers as much as the specific locations of the company’s expansion. For example, Marriott’s expansion plan has been to establish
the brand in gateway cities and then to expand beyond based
on market feasibility, be it through franchising or ownership. In
Europe, due to its relatively low brand recognition, Marriott has not
used franchising as an expansion strategy; instead, it has acquired
established international brands to achieve international growth
and expansion.
The results reveal that a hotel company’s decision to go international is negatively related to size (operationalized as the scale of
U.S. operations), although it is not statistically significant with a pvalue about 0.10, which contradicts mainstream research findings.
Although a positive impact is expected for multi-unit franchising,
little support is provided by the data analysis.
In the hotel internationalization process, size is usually regarded
as having a positive effect on franchising practices, mainly because
large hotel companies have more resources to allocate to the franchising process and a higher resilience to failure should the system
fail. Presumably, this may also have an impact on management
risk perception in that larger hotel companies will experience less
of an impact of financial risk, which is oftentimes reflected by
the franchising cost. However, previous research findings on the
relationship between firm size and the decision to expand is inconsistent, and sometimes even contradictory (Azevedo and Silva,
2001). It may be the case that it is not the hotel size per se that
determines whether to internationalize through franchising, but
the characteristics of the particular transaction that will influence
the decision. This has to be taken into consideration when different
hotel market segments representing different levels of asset specificity expand internationally (Rodriguez, 2002). As a result, hotel
companies choose to use differing entry strategies when expanding
to international markets.
For example, Chen and Dimou (2005) argue that services are
usually more basic in budget and mid-scale hotels in comparison to
upscale hotels. In this case, the services provided and the required
skills from management and staff are limited and can be reduced
to standard operating procedures and transferred to a third party
via a franchise package. However, for high-end luxury hotels, the
provision of service requires highly skilled employees to guarantee the level of service to meet brand expectations. In this process,
the transfer of knowledge is more complicated since this type of
knowledge cannot easily be translated into standard operating procedures. As argued by Valikangas and Lehtinen (1994), franchising
is commonly associated with problems of accountability and control. As a result, it is less suited to services characterized by high
degrees of intangibility and of consumer/producer interactions and
it is more suited to generic services that evolve around a recognized
brand name, a basic standard performance, and a wide network of
service units. When it is translated into hotel internationalization,
I. Alon et al. / International Journal of Hospitality Management 31 (2012) 379–386
Dev et al. (2002) observe that franchising is more popular in the
economy or middle market, whereas management contracts are
more popular in the luxury market. They argue that the trend to
choose a management contract becomes stronger as the size of
the hotel increases and quality competence becomes an important source of competitive advantage. However, when quality is
not an important source of competitive advantage, management
contracts are less preferred and the use of franchising is more
likely as the hotel size increases. As a result, regardless of size,
franchising is not a commonly sought after entry mode in upper
hotel market segments, compared, for example, with management
contracts.
The decision can also be affected due to quality assurance and
free-riding control. For example, high control modes of expansion
are considered to be less risky with respect to quality depreciation.
Furthermore, free riding is more likely to occur when the value of a
brand name is high, thus requiring higher degrees of control. Again,
regardless of size, if they decide internationalize, higher quality
brand hotels will be more likely to choose a highly controlled, highly
integrated entry mode rather than a franchising arrangement.
It was noted in the interviews with the three industry informants that in addition to all the factors identified in the model
testing that affect a hotel company’s likelihood of going international, brand might play an important role in determining what
strategies are adopted when internationalizing. Informant A cited
Hilton Hotel Corporation’s franchising strategies with their economy brand Hampton Inns in international markets as an example.
Although the brand (i.e., Hampton Inns) has more than 1400 hotels
and nearly 172,000 rooms under the Hilton brand umbrella, it is
largely unknown outside of the United States. Hilton’s management decided to arm the economy brand (along with Doubletree
and Embassy Suites) with full equity of the Hilton name itself,
and renamed the Hampton brand “Hampton by Hilton” outside of
the United States. He justified this strategy by commenting that
“while all three brands are well known within the United States,
the Hilton name – one of the most recognized in the hospitality
industry worldwide – is far better known in Canada and Latin America, representing a supreme opportunity for Doubletree, Embassy
Suites, and Hampton Inns to be better recognized in those areas
by virtue of their Hilton affiliation.” As a result, they added “by
Hilton” to certain brands that are rapidly expanding into new markets abroad. This strategy was adopted in their merger with Hilton
International to enhance the goal of becoming the premier global
hotel franchising company. These strategies will afford Hilton a
good opportunity to further diversify its income with the internationalization of its highly successful portfolio of brands through
franchising and a multi-unit area development agreement.
The three case studies – Ramada, Best Inn and Candlewood –
that departed from the empirical results deserve a closer examination. While Candlewood showed a greater interest in international
expansion via franchising, Best Inn and Ramada showed less willingness for such expansion. Ramada, established in 1954, only
started to franchise in 1990. It has almost 900 properties, but only
about 7.9% of them are international and only in Canada, the closest culturally and geographically to the USA, where the company
is based. Ramada’s properties concentrate in California, Florida and
Texas. By developing a strong US-based strategy, Ramada was able
to compete with other chains effectively in the North American
market.
Best Inn, on the other hand, has another set of competencies. It
specializes in the budget part of the market and has carved niche
among ethnic entrepreneurs as franchisees. The low cost strategy
developed by the company for American consumers and the franchisee recruitment strategy, suited for American conditions, has
discouraged its management from pursuing riskier, more remote
locations for expansion. Candlewood, on the other hand, is part
385
of the InterContinental Hotels Group and has the backing of a large
conglomerate with massive experiences abroad. IHG also owns Holiday Inn, Crown Plaza and InterContinental Hotels and Resorts, all
of which, have strong international assets. Sharing of knowledge
and resources has helped propel Candlewood into the international
marketplace.
While this study uncovers some of the determining factors of
internationalization of hotel franchising, it is not without limitations. The study only focuses on key organizational variables in
predicting hotel internationalization through franchising, and does
not consider other factors that might create different dynamics in
the process of international franchising, such as market-specific
characteristics and other situational factors. It is easily conceivable
that the franchising process is market-sensitive and as a result market characteristics play an important role in affecting franchising
operations. These factors may include, among others, the market
segment, the degree of control, either by the hotel industry sector
or by government policy, the risks and costs of entry, and similarities of cultural norms and business. In addition, other situational
factors potentially will be important in affecting how hotel franchising is carried out in a certain market, such as the maturity and
stability of the financial market of the host country, the level of technology infrastructure development in the market, and the overall
economic and financial conditions in the target market. Although
there is anecdotal evidence in a number of case studies in different
markets (e.g., Vianelli and Alon, 2007), there are no systematic studies examining the impact of market-specific dynamics and other
situational factors on international hotel franchising. Whereas this
line of research draws heavily on two major theoretical underpinnings: transaction cost theory (Williamson, 1985) and agency
theory (as adopted in this study), a more holistic approach using a
wider theoretical spectrum, such as the eclectic model expounded
by Dunning (1981) should be encouraged to integrate both internal and external perspectives to explain hotel internationalization.
Efforts in this direction in future research will be both worthwhile
and rewarding.
From a theory development perspective, hotel internationalization research generally needs to move from normative descriptions
and formulaic assessments to a more in-depth, internalized, and
processed-oriented understanding. Although this study ventures
into efforts to corroborate model testing results with in-depth
industry experts interviews, additional work should be encouraged
to discover richer market-specific factors in internationalization
that challenge the assumptions that business is business and
management is management whenever it occurs and wherever
it is practiced (Boddewyn, 1999). Obviously, more internalized
qualitative research will avoid the parochialism and determinism observed in quantitative studies. In addition, joint efforts by
researchers in different industrial sectors, particularly the service industry, will contribute to more comparative studies that
will enhance our understanding of internationalization strategies
across industries and will help shape and refine the agenda for
future research in hotel internationalization.
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Academic Article Critique
You will be assigned to read and critique two of these papers during the course. You may select
any two articles. Academic research may provide helpful insights to practitioners. As a graduate
student, one of the more important skills you will develop is the ability to read, understand, and
critique an academic article.
For this assignment, you need to prepare and submit a critique of one of the articles in the
Syllabus & Course Info page in ulearn. Your critique must answer the following questions:
1. What was the intent of this research?
2. How was the research conducted (method)?
3. What was the sample for this research, and how was it determined?
4. What were the conclusions of the article?
5. Is this research actionable? In other words, could it be put into use in any practical way
in a Franchisee or Franchisor business?
6. What in this article did you find most important?
7. What in this article did you find least important?
Your paper needs to meet the following formatting requirements:
Microsoft Word Document
• Margins 1 inch in each side, 1.5 top and bottom.
• Double spaced
• Any citations in text in APA 6th Edition format.
• References at the end of your critique, also in APA 6th edition format.
• No spelling errors
• No grammatical errors
A Turnitin Originality Score of 25% or less (in other words, more than 75% of the paper
must be in your own words
• Your Article Critique must be submitted via the Turnitin link before 11:59PM on Sunday
of the week assigned
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