The Effect of Franchising on Establishment Perfomance in the Russian Restaurant Industry

Much of the literature on franchising focuses on the fact that franchising solves agency problems between two parties: the central company and the franchisee firms by transferring ownership and managing to the franchisee establishment. Franchisees have a high level of knowledge about local markets, as well as are motivated to develop their business, while the franchisor is interested in the royalties received from the franchisee's revenue. Despite the fact that this topic is widely known in the literature, there is little practical evidence for this theory. The purpose of this paper is to compare the performance of each side of the franchise and identify which establishment performs better: owned by franchisee or by franchisor and also to determine which firms will be more efficient in terms of franchising, firms dedicated to the small or to the medium-sized business. Our first assumption is that firms owned by franchisees are more efficient than establishments owned by franchisors. Our second assumption is the fact that businesses owned by franchisees will be more efficient in medium-size business than in small-sized ones. To confirm this theory, we use data that was extracted from Rosstat 2015 Continuous statistical observation of small and medium-sized businesses of Russia and data received from a member of Russian Franchising Association - Franshiza.ru. In order to achieve the goals, we determine why the implementation of franchising should affect the efficiency of the company, what is the efficiency of the franchise organization, and how to accurately measure this efficiency. Then, we conduct a two-step analysis of franchise effectiveness using Data Envelopment Analysis and the OLS regression model and based on the analysis draw conclusions about the effectiveness of franchise implementation. We find a strong and reliable franchise effect for food service establishments, and this effect is stronger in medium-sized businesses than in small ones. Key words: franchise, Russian franchising market, restaurant business franchise, franchising models, business success, managerial control, firm performance, agency theory.