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The Role of Trust 1

The Role of Trust in Franchise Organizations

Michael H. DickeyDickey Analytics, LLC

D. Harrison McKnightMichigan State University

Joey F. GeorgeFlorida State University

Abstract

Purpose – This study examines how two types of trust affect five key franchisee

attitudes/behaviors within a setting where franchisees have strong contractual ties to the

franchisor. The five attitudes/behaviors are: identification and satisfaction with the franchisor,

compliance and non-compliance with franchisor directives, and perceived relationship quality.

These attitudes/behaviors were chosen because research has found each to affect franchise

performance.

Design/Methodology/Approach – Our model features two trusting beliefs which influence

attitudes/behaviors. The study gathers US franchisee questionnaire data then analyzes the model

using partial least squares techniques.

Findings – Trusting belief-competence was found to reduce non-compliance with the franchisor,

and also increase identification with the franchisor. Both trusting belief-competence and trusting

belief-honesty were found to enhance satisfaction with the franchisor and perceived relationship

quality. Neither of these two trusting beliefs was found to influence compliance with franchisor

directives. Perceived mutual commitment appears to strongly influence both trusting beliefs,

whereas length of time as a franchisee does not.

The Role of Trust 2

Research Limitations/Implications – The findings support relational contracting theory,

showing that even within a contract, trust exerts a significant influence on vital franchisee

attitudes. Other research shows these attitudes/behaviors influence franchise performance,

though the present study does not measure performance.

Practical Implications – The results suggest franchisee trust is key to the ongoing franchise

relationship. Hence, franchisors should try to build franchisee trust. They can do so by enhancing

mutual commitment and by supplying well-conceived new products and marketing campaigns.

Originality/Value – This study clearly shows the value of franchisee trust and suggests several

ways to build it.

Paper type – Research

Keywords – Trust, Commitment, Compliance, Franchise organizations, Identification, Intra-firm

relationships, Relational, Contract

The viability of franchising as an organizational form has been called into question by a

number of researchers. On average, franchise organizations deliver poorer product quality

(Michael, 2000), are less successful at coordinating marketing strategies (Michael, 2002), and

advertise less (Michael, 1999) than their wholly company-owned competitors. The theoretical

explanation offered is that franchisees have more incentive to “free ride.” In other words, to take

advantage of the positive effects of others’ investments, such as product quality and advertising,

while minimizing investments of their own (Brickley et al., 1991). “[T]he investment of any

given franchisee ‘spills over’ to other franchisees across the chain, as mobile customers take

their experience from one unit to another. In the presence of such spillovers, franchisees have an

incentive to underinvest in advertising and quality” (Michael, 2002, p. 326). Despite franchisor

The Role of Trust 3

efforts to monitor and control franchisee operations, such as inspection audits and contractually

mandated financial and marketing reporting, free riding continues to be a threat to the

competitive advantage offered by the franchise organizational form (Michael, 2000).

Franchisees are not the only ones with an incentive to behave opportunistically. Some

franchisors are purported to engage in questionable practices such as encroaching on franchisee

territories (Schneider et al., 1998), misusing cooperative advertising funds (Luxenberg, 1986),

using discriminatory product pricing (Emerson, 1998), and employing unfair contract

terminations (Rau, 1992). Typically, franchisors possess substantially more bargaining power

than their franchisee partners (Klein, 1980), which makes it possible for franchisors to “extract

unfair concessions” from franchisees (Kumar, 1996, p. 92).

Thus, we see that despite the use of contracts to safeguard exchanges, incentives for

opportunism are high on both sides of the franchisee-franchisor equation. Not only are these

incentives high, but opportunistic behavior appears to reduce long-term performance. For

example, when a franchisor tries to encroach on a franchisee territory, the satisfaction of the

franchisee will drop, leading to franchisee acts of non-compliance with franchisor directives and

a franchisee perception that the quality of their relationship is deteriorating. An explanation for

such situations may be grounded in relational contract theory (Macneil, 1980), which asserts that

because some contracts (like franchise contracts) cannot fully articulate the obligations of the

exchange, these contracts are inherently relational in nature (Corones, 2000). According to

Macneil (1980), relational contracts involve ongoing relationships between the parties that define

informally what parties expect aside from formal contract terms. Relational components of

contracts must be informally defined because they cannot typically be codified into well-defined

obligations (Goetz and Scott, 1981). Inability to capture all contingencies in the contract may

The Role of Trust 4

result from complexity and/or uncertainty in the exchange (Goetz and Scott, 1981). For instance,

uncertainty in long-term market conditions over a ten-year franchise contract period may not

permit a franchisor to fully specify its obligation to the franchisee to provide marketing support.

Likewise, the ambiguity implied in terms such as “high quality customer service” impedes full

definition of franchisee obligations in this area. So the relationship between the exchange

partners becomes more salient than in conventional discrete transaction contracts in which

contract terms are less ambiguous. As an example, company A purchases ten computers from

company B, at a stated price, to be delivered by a certain date (Macneil, 1980),.

One governance mechanism that may serve as an alternative to contracts in inter-

organizational relationships is trust (Alvarez et al., 2003). Because franchise contracts are

inherently relational (Goetz and Scott, 1981), we believe trust may play a crucial role in

minimizing opportunistic behavior such as free riding. While contract terms and franchisor

hierarchical control mechanisms also govern franchisee-franchisor exchanges, trust is central to

almost any relationship (Golembiewski and McConkie, 1975; Mishra, 1996), and becomes

particularly important in situations of risk, uncertainty, or high likelihood of opportunism

(Cummings and Bromiley, 1996). In general, trust has been found to be very helpful in

cooperative endeavors (Axelrod, 1984; Fukuyama, 1995) and plays an important role in helping

parties work through conflict productively (Anderson and Narus, 1990; Deutsch, 1973). This

study examines the effects of franchisee trust in the franchisor (i.e., from the perspective of the

franchisee).

We view trust more as a utilitarian concept rather than as an end in itself. Trust is not an

end in itself because too much trust can cause as many problems as too little trust. For example,

abuses may occur when one party acts with unquestioning trust of the other. However, within

The Role of Trust 5

reasonable bounds, and accompanied by other governance mechanisms, trust can produce

favorable franchisee perceptions.

Despite the seeming salience of trust in franchise organizations, to our knowledge it has

not been explored in the extant literature. Thus, we examine the role of trust in franchise

organizations. We argue that the degree to which a franchisee trusts his or her franchisor plays a

critical role in (1) reducing opportunistic behavior such as non-compliant free riding, and (2)

shaping franchisee attitudes vital to the franchisor-franchisee relationship. We look at the

relationship of trust to two franchisee behaviors – franchisee compliance and franchisee non-

compliance – which we use as proxies for (non-)opportunistic behavior. Such behavior can

negatively impact franchise performance. We examine the relationship of trust to three attitudes

– identification with and franchisee satisfaction with the franchisor, and perceived franchisor-

franchisee relationship quality – which have been theorized as positively influencing the

performance of franchise organizations. Finally, we look at the relative strength of two possible

drivers of trust – length of time as a franchisee, and perceived mutual commitment to the

franchisor.

By determining the extent to which trust reduces opportunistic behavior and helps

develop positive franchisee perceptions of the franchisor, we contribute to research in such

relationships. Specifically, our contribution consists of examining how trust, a relational

governance mechanism, works within the context of long-term contracts and hierarchical

controls that are also intended to minimize free riding and nurture franchisee-franchisor

relationships. We examine the effects of two types of trust. This article will determine the extent

to which trust affects important variables when contractual agreements already govern the

relationship. In franchising, commitment is already formalized by a long-term contract. This

The Role of Trust 6

article also contributes by showing the extent to which franchisee perceived mutual commitment

influences trust in the franchisor.

Arguably, trust does not work in a vacuum (Bennett and Robson, 2004), but operates in

conjunction with other control mechanisms that manage risk. Indeed, Poppo and Zenger (2002)

demonstrate that contractual governance and relational governance affect each other. For this

study, we decided to address the effects of trust within a contractual setting, in order to see

whether or not trust has any impact when contracts are used. Thus, we do not argue that trust

substitutes for contractual mechanisms, but we show that trust still has an effect within a setting

where contracts already address significant risks within the relationship but in which

opportunism is still quite possible.

This article is organized as follows. First, we present a conceptual model that delineates

two antecedents and five consequences of trust. We argue that the five consequences are key to

franchise performance. Second, we outline the research methodology used for a study of food

service industry franchisees, followed by a presentation of the results. Finally, we discuss the

implications of the findings.

Conceptual Model

A conceptual model (Figure 1) shows that trust may be positively influenced by duration

of franchisee experience and franchisee commitment to the franchise relationship. Other

antecedents of trust could also be pursued, such as distributive and procedural justice (Kumar,

1996; Mayer and Davis, 1999) or structural guarantees (Zucker, 1986). However, we chose to

examine only two antecedents of trust in this study. The model also shows that trust in turn may

positively influence the two franchisee behaviors and the three franchisee attitudes specified

above. These five behaviors and attitudes influence franchise performance. Though we briefly

The Role of Trust 7

review past research that links these to performance, we do not test these links. Hence, they are

shown as dotted line linkages. Sutton and Staw (1995) suggest that it is acceptable for

researchers to propose more extensive models than they test in a single study. In the next section,

we discuss the relevance of trust to the franchise context, the viability of the franchisee behaviors

as proxies for opportunistic behavior, and the importance of the five franchisee behaviors and

attitudes to the performance of franchise organizations. We then develop the hypotheses shown

in Figure 1.

_____________________________

[Insert Figure 1 about here.]

_____________________________

Model Constructs and Their Relationship to Franchise Performance

Trust. Trust has been defined in many ways. Some psychologists defined trust as a

personality trait (Rotter, 1971) or as a trusting behavior that leaves one vulnerable to the other

(Kee and Knox, 1970; Zand, 1972). More recently, trust has tended to be defined in one of two

ways: (1) as a confident belief or expectation (i.e., a trusting belief), and (2) as a willingness or

intention to depend on the trustee (i.e., a trusting intention). Trusting beliefs involve perceptions

that the other party will act in ways favorable to the trustor (Boone and Holmes, 1991; see also

Gambetta, 1988; McEvily et al., 2003), or that the other party has ethical, efficacious, or

favorable characteristics (Hagen and Choe, 1998; Lewicki et al., 1998).

By contrast, trusting intention involves a willingness to become vulnerable to the other or

a willingness or intention to depend on the other (Baier, 1986; Currall and Judge, 1995). Currall

and Judge (1995, p. 153) suggest that their trust construct “corresponds to the behavioral

The Role of Trust 8

intention construct” in the Fishbein and Ajzen (1980) theory of reasoned action. Trusting beliefs

is similar to the Fishbein and Ajzen belief construct.

Interestingly, Mishra (1996) and Rousseau et al. (1998) include both trusting intention

and trusting beliefs in their more comprehensive trust definitions. By contrast, Mayer et al.

(1995) set forth separate definitions for trusting intention and trusting beliefs, suggesting that

trusting beliefs lead to trusting intention. They delineate three trusting beliefs – ability,

benevolence, and integrity. Other beliefs exist, such as dependability (Kumar, 1996), reliability,

predictability (Rempel et al., 1985), competence (similar to ability), judgment, and openness

(Gabarro, 1978; Mishra, 1996). We choose to call these two types of trust, respectively, “trusting

intention” and “trusting beliefs,” following the trust concept typology of McKnight et al. (1998;

2001). Some evidence that trusting beliefs predict trusting intention has been found in studies on

trust in leaders (Mayer and Davis, 1999).

This study focuses on trusting beliefs rather than on trusting intention for several reasons.

First, franchisee trusting intention may arise because of structural or situational issues rather than

because of franchisee beliefs in the franchisor, and we wanted to focus directly on the relational

aspects of governance. Second, in a franchise environment, trusting intention is indicated

contractually. By signing the franchise agreement, the franchisee indicates his/her willingness to

depend on the franchisor. In fact, signing the agreement makes the franchisee dependent on the

franchisor in many ways, such as depending upon the franchisor to provide a quality product. At

the same time, the franchisee becomes a much less powerful partner (Kumar, 1996). Hence,

trusting intention should exist for nearly all franchisees, which led us to believe that variance in

trusting intention might be minimal. Third, specific trusting beliefs about the franchisor are

likely to be more varied and may have more to do with the day-to-day relationship between the

The Role of Trust 9

franchisee and franchisor, which is very likely to affect franchisee behaviors and attitudes toward

the franchisor.

The conceptual model includes two trusting belief constructs: trusting belief in franchisor

competence and trusting belief in franchisor honesty. Trusting belief-competence is the degree to

which the franchisee believes that the franchisor is capable of performing its duties. Trusting

belief-honesty is the degree to which the franchisee believes in the franchisor’s truthfulness.

Trusting belief-honesty is narrower than integrity, which includes devotion to other ethical

principles besides truthfulness (Mayer et al., 1995). It is similar to one aspect of the type of trust

Kumar (1996) called dependability – that the trustee “would honor their word” (Kumar, 1996, p.

95). Although other trusting beliefs exist (as listed above), these two constructs were selected

because honesty and competence beliefs about the franchisor give the franchisee assurance that

the franchisor meets basic criteria for doing business together. Unless the franchisor is honest

and able to perform its duties well, the franchisee will feel insecure in the relationship, and will

resort to control measures for protection. Trusting beliefs are measured from the point of view of

the franchisee because we are interested in how they view the franchising relationship,

recognizing that their trusting beliefs in the franchisor are likely to differ from the franchisor’s

trusting beliefs in them because franchisors, like manufacturers, often have blind spots about

their retail associates (Kumar, 1996). We use the unmodified term “trust” to refer to the above

two trusting beliefs in general and to convey information from the literature on trust.

Length of Time as a Franchisee. The length of time as a franchisee reflects the duration

of a franchisee’s experience with a franchisor. Duration of simple exchange is a factor of long-

term cooperation (Poppo and Zenger, 2002). The relationship between a franchisor and an

individual franchisee varies over time, depending on the stage of life cycle development

The Role of Trust 10

(Schreuder et al., 2000; Justis and Judd, 1998). Knowledge about the franchise system (Cormack

et al., 2001), development of greater independence (Peterson and Dant, 1990), and the ability to

grow market share (Lillis et al., 1976) are examples of changes that occur in franchisees over

time. Because the literature suggests that experience as a franchisee can affect relationship

variables, and because trust is believed to develop through experience (Blau, 1964), we included

length of time as a franchisee as a possible antecedent of trust.

Perceived Mutual Commitment. Commitment is the extent to which parties feel likely to

remain in a relationship (Kelley, 1983). Businesses, like franchise organizations, often ensure

commitment among parties through contracts, promises, or other agreements (Williamson,

1993). Research on commitment in the franchise context is sparse, but commitment is an

important driver of trust in all types of relationships (Axelrod, 1984). Even when parties are

committed by contract, especially contracts that are more relational in nature, the individuals in

the relationship need the lubricant of a felt psychological commitment – that we consider a form

of relational governance – in order to fully trust and cooperate with each other. Perceived mutual

commitment could wax or wane over the period of the contract as franchisees (or their

franchisor) consider their future.

Franchisee Compliance and Performance. Franchisee compliance is the degree to which

a franchisee adheres to franchisor directives, policies, and procedures, regardless of the reason

for conformity. Compliance means the franchisee does not opportunistically try to “go around”

franchisor directives. Compliance could be enforced through an explicit contract, or it could be

managed through trust and cooperation. Good levels of franchisee compliance foster unit growth,

a central concern of franchise organizations (Bradach, 1998). The maintenance of uniformity

establishes a franchisor’s unique brand reputation, upon which individuals often base decisions


to purchase franchises (Wimmer and Garen, 1997). The franchisor’s ability to command a higher

initial franchise fee is partially based on that reputation as well (Wimmer and Garen, 1997).

Franchisors sometimes reward compliant franchisees with opportunities for expansion (Bradach,

1998). For instance, the owner of a recently renovated unit that provides most new

products/services is more likely to be offered a new unit. Thus, in effect, higher levels of

franchisee compliance means that the franchisor has a greater pool of existing franchisees from

which to grow the organization, thereby decreasing training and negotiation costs for new units,

which will improve franchise performance.

High levels of franchisee compliance also directly affect uniformity in operations, for the

degree of uniformity found across franchise units is an aggregate of individual franchisee

compliance. However, maintaining uniformity is difficult. The inherent conflict between sales

maximization and profit maximization sometimes discourages compliance. In addition, tension

can occur between the franchisor and a given franchisee as a franchisor attempts to maintain

uniformity at the expense of local customer needs (Bradach, 1998). For instance, in a regional

coffee franchise, the franchisor changed its approved brand of biscotti. Several franchisees made

the switch only to see biscotti sales plummet. Despite the decreasing sales, since the old brand

could not be shipped cost effectively to newer markets, the franchisor continued offering the new

brand to maintain uniformity, much to the displeasure of the affected franchisees.

Compliance should be a good proxy for non-opportunistic behavior. That is, higher levels

of compliance should indicate lower levels of opportunistic behavior, such as free riding or

refusal to follow procedures. For example, when a coffee shop franchisee adheres to franchisor-

specified recipes for cappuccino, this implies that the franchisee is not skimping on the amount

of espresso used in the drink.


Non-compliance. Non-compliance is a distinct concept from compliance, just as

researchers have shown for such opposites as love and hate and positive/negative affectivity

(Lewicki et al., 1998). Whereas compliance is the degree to which a franchisee adheres to

franchisor directives, policies, and procedures, non-compliance is the degree to which a

franchisee initiates deviant policies and procedures that are not approved by the franchisor. The

key distinction between the two constructs is whether it is the franchisor or the franchisee who

initiates a given directive, policy, or procedure. By our definition, a non-compliant smoothie

franchisee might introduce a soup product line that was not directed or approved by the

franchisor, while maintaining full compliance with all franchisor-specified smoothie recipes. A

franchisee might do this to augment sagging winter time sales, but this type of behavior may

threaten the chain’s goal of uniformity and maintenance of brand image, just as failure to comply

with franchisor directives does. This is also an example of opportunistic behavior, in which the

interests of the franchisee supersede the interests of the franchisor.

Organizational Identification and Performance. Organizational identification (OI), a

form of social identification (Ashforth and Mael, 1989), is an individual state that describes the

extent to which the attributes an individual uses to define the organization are also used to define

that person (Dutton et al., 1994). Franchise performance depends upon franchisee identification

with the franchisor. If franchisees strongly identify with the organization, the franchisor will be

better equipped to coordinate and control franchisees who are geographically dispersed, retain

them as franchisees, and provide a context that fosters organizational citizenship behaviors

(Wiesenfeld et al., 1999) such as information sharing (cf. Constant et al., 1994). Better

coordination and control should facilitate uniformity in product/service among franchisees,

which is key to preserving the franchisor’s brand equity (Bradach, 1998). A franchisee that


identifies closely with the organization is more likely to work toward franchisor goals, since the

goals will be self-relevant (Scott and Lane, 2000).

Franchisee Satisfaction and Performance. Franchisee satisfaction is the extent to which a

franchisee is content with the franchisor as it affects his or her role in the franchise organization.

Satisfaction with the franchisor will positively affect franchise performance. For example,

satisfied franchisees are likely to be more profitable than dissatisfied franchisees (Morrison,

1997), who often complain of poor financial return on their investment (Walker, 1971). Units

that perform well generate added revenue for the franchisor and help preserve a positive brand

image. Given that expansion is a key aspect of franchise performance, franchisees who are

satisfied and profitable are likely to expand by opening new outlets, thereby increasing

performance. Satisfied franchisees are also likely to encourage prospective franchisees to join the

system.

Perceived Relationship Quality and Performance. Perceived relationship quality can be

defined as the degree to which a franchisee perceives that the working relationship with the

franchisor is harmonious. The potential for conflict between a franchisor and its franchisees is

high due to the way profits are distributed, where franchisors are paid a royalty regardless of the

franchisee’s profitability. Thus, franchisees have a residual claim to profits (Brickley and Dark,

1987). In addition, the franchisee’s entrepreneurial disposition (Dant and Gundlach, 1998)

sometimes contributes to conflict. The franchisor’s goal of uniformity in the system (Bradach,

1998) and a franchisee’s independent nature, often result in relational disharmony (Dant and

Gundlach, 1998) unless the relationship remains high in quality. In other words, perceived

relationship quality facilitates franchise performance by enabling the parties to cooperate in a

harmonious manner. From the above discussion, it should be clear that each of the five model


consequences of trust contributes to franchise performance, based on current literature. We now

turn to justifying the study’s hypotheses.

Hypotheses: Antecedents of Trust

Trust Building through Experiential Interaction. Trust is traditionally believed to develop

through familiarity (Lewicki and Bunker, 1996; Lewis and Weigert, 1985; Luhmann, 1979) or

experience with the other party (Blau, 1964). Relational contract theory suggests trust builds as

people develop “relational norms to govern their exchange” (Poppo and Zenger, 2002, p. 722).

Trust builds a little at a time as parties interact, making and executing commitments with each

other (Ring and Van de Ven, 1994). Added experience builds trust because experience forms the

basis of information which reveals the extent of the other party’s trustworthiness. Gefen (2000)

found evidence for this thesis by demonstrating that familiarity with an e-commerce vendor

influenced trust in that vendor. Likewise, length of time as a franchisee should build familiarity

with the franchisor and should, therefore, be associated with higher franchisee trust in the

franchisor.

Trust is built on information about the trusted party. As an individual gets to know

another party, that individual develops more detailed schemas about the other (Berscheid, 1994),

including schemas about situations in which the other is trustworthy (Lewicki, et al., 1998).

Experience with the other party should relate positively to trust. This is especially true of those

who have worked within the same company because their social connectedness to the company

is greater. The more connected the social network, the greater the trust (Lewis and Weigert,

1985). Although negative experiences can lower trust, if parties come to distrust each other over

time, they tend to exit the relationship. Hence, over time, most remaining parties tend to trust


each other. Franchise contract periods limit exit to an extent, but in extreme cases of distrust,

parties still tend to exit (Rau, 1992).

Franchisor/franchisee interactions reveal information about the other. Franchisors

routinely send written correspondence such as marketing plans and audit reports to franchisees,

and also hold face-to-face meetings. Likewise, franchisees use their franchisor as a resource to

answer operational questions and to prepare strategic plans. Thus, there is ample opportunity to

build trust through experiential interaction in a franchise organization. Trusting belief-

competence can develop over time as franchisees see repeated positive financial results from

implementation of and adherence to plans, procedures, and directives. Likewise, trusting beliefs

in franchisor honesty can develop through positive experiences with franchisors’ keeping their

word about issues such as product price increases, capital expenditures, and advertising

campaigns.

H1a: The length of time spent as a franchisee will be positively related to franchisee trusting beliefs in the franchisor.

H1a1: The length of time spent as a franchisee will be positively related to franchisee trusting belief in franchisor competence.

H1a2: The length of time spent as a franchisee will be positively related to franchisee trusting belief in franchisor honesty.

We also found logic and evidence in the literature that the above arguments may not hold.

For example, it is quite possible that the quality of the experience a franchisee has with the

franchisor is more important than the duration of that experience. Over time, some franchisees’

trust may increase while others may decrease, causing no significant differences on average.

An emerging body of trust literature also says that trust in the other party does not build

gradually over time, as the traditional trust theorists cited above suggest, but starts at a medium

to high level when parties form a work relationship (McKnight et al., 1998; Meyerson et al.,


1996). After the initial period, trust tends to stay relatively level unless some unexpected events

cause it to change. As evidence, Jarvenpaa and Leidner (1999) found that virtual team trust

stayed relatively level over time instead of increasing gradually. It is also possible that franchisee

trust may be highest at contract signing, perhaps due to assumptions and illusions (McKnight et

al., 1998) and then may decrease over time.

As the contact wears on, the natural adversarial nature of the franchisee-franchisor

relationship may also inhibit experiential gains in trust. If a franchisee takes free rides (e.g., cuts

corners on quality), the franchisor may try to apply firmer controls (e.g., more compliance

audits). This may hurt franchisor trust because a tightening of controls indicates lower franchisor

trust, which is then reciprocated by the franchisee. The franchisee may also find over time that

the franchisor is not as competent at marketing to the local customers of the franchisee as was

originally thought. The franchisee may take steps to shore up the situation by ignoring franchisor

directives. This would again decrease trust between the parties. Zand (1972) explained that a

cycle of increasing control steps leads to lower trust, which leads to additional control, resulting

in a deteriorating relationship.

The long-term contractual nature of the franchising relationship itself tends to break the

cycle of self-selection that would normally occur. That is, in many relationships, a party who

becomes disgruntled or distrusting can exit. This suggests that those who stay over time tend, on

average, to be increasingly trusting of each other. However, the 10-to-20-year franchise contract

inhibits exit, so some franchisees that stay are likely to develop low trust in the franchisor. Since

the trust of dissatisfied franchisees tends to spiral down, this will offset the trust increases in

franchisees who are satisfied with the relationship, resulting in no significant link between

relationship duration and franchisee trust.


Because different aspects of the trust literature support both a link from length of time to

trust and the lack of a link, we state Hypothesis 1 both ways. The intent of H1 is to test which set

of arguments holds in the franchise context.

H1b: The length of time spent as a franchisee will NOT be related to franchisee trusting beliefs

in the franchisor.

H1b1: The length of time spent as a franchisee will NOT be related to franchisee trusting belief in franchisor competence.

H1b2: The length of time spent as a franchisee will NOT be related to franchisee trusting belief in franchisor honesty.

Trust Building through Pereceived Mutual Commitment. Trust in any relationship,

including franchises, is enhanced if parties are committed to the longevity of the relationship

(Dodgson, 1993; Kelley, 1983). Contracts provide long-term commitment, but parties do better

when they feel a commitment that goes beyond contractual obligations (Caldwell and Karri,

2005). Commitment builds trust by reducing uncertainty about fulfilling future interdependent

needs. Thus, commitment provides a proxy for information about the future that builds trust

(Axelrod, 1984). For example, work in game theory has found over and over that when players

know they will continue to play with the other party, their trust is higher than otherwise

(Axelrod, 1984). Committed parties know they can either cooperate or harm each other over

time, so they tend to trust and cooperate out of mutual self-interest. This is what Axelrod calls

the “shadow of the future” commitment that tends to build trust. Heide and Miner (1992) review

game theory and evidence from organizational studies, which consistently shows that

commitment to a future relationship builds trust. Heide and Miner found that anticipation of

future interaction builds cooperation, a strong correlate of trust.


Parties learn to gauge others’ commitment and can, therefore, forecast how long the

relationship will last. If a party believes a relationship is short term, that party may become more

critical of the other party’s attributes, including trust-related traits like competence or honesty. In

this study, we are concerned with franchisee attitudes, not those of the franchisor; thus, our

hypothesis reflects only franchisee perceptions of mutual commitment.

H2: The franchisee’s perception of mutual commitment to the franchise relationship will be positively related to franchisee trusting beliefs in the franchisor.

H2a: The franchisee’s perception of mutual commitment to the franchise relationship will be positively related to franchisee trusting belief in franchisor competence.

H2b: The franchisee’s perception of mutual commitment to the franchise relationship will be positively related to franchisee trusting belief in franchisor honesty.

Hypotheses: The Role of Trust in Reducing Opportunistic Behavior

Franchisee Compliance. The natural tensions between a franchisor and its franchisees

that arise in spite of contractual binding can be mitigated by trust, which in turn influences the

level of franchisee compliance. Trust that develops between business partners is responsive to

one’s needs (Holmes and Rempel, 1989). A high level of franchisee trust would indicate that the

franchisee believes the franchisor has been responsive. In trusting relationships, reciprocating is

natural and expected (Luhmann, 1979). Thus, a trusting franchisee would be responsive to the

franchisor by complying with franchisor’s directives. Reciprocal interaction has been found to

occur in game theory, for instance, as people choose to cooperate with a cooperative partner.

Additionally, high trust partners are more willing to take risks by cooperating (Mayer et al.,

1995). The high trust franchisee will be more willing to comply with risky franchisor wishes than

one who trusts less because trust makes one more open to trustee influence (Gabarro, 1978). No

contract can be made so air-tight that it precludes the need for trust (Macneil, 1980).


These arguments can be extended to trust in franchisor competence and honesty. For

example, a string of successes with franchisor-devised marketing plans will produce trusting

belief-competence that will likely result in franchisee compliance with future plans. Likewise, a

franchisor that is true to its word on issues such as the timing of capital expenditures required of

the franchisee will produce trusting belief-honesty, making it more likely to gain franchisee

compliance with investment directives.

H3: Franchisee trusting beliefs in the franchisor are positively related to compliance with franchisor directives.

H3a: Franchisee trusting belief in franchisor competence is positively related to compliance with franchisor directives.

H3b: Franchisee trusting belief in franchisor honesty is positively related to compliance with franchisor directives.

Non-compliance. We posit that trust will be negatively related to franchisee non-

compliance with franchisor directives. When someone has low trust in another, the person is

unwilling to be influenced by the other party (Zand, 1972). Thus, to the extent a franchisee feels

the franchisor gives incompetent advice or is dishonest (indicating low trust), the franchisee will

not comply with franchisor wishes. Furthermore, because low trust can distort or close

communication (Golembiewski and McConkie, 1975), the low trust franchisee may also

introduce unauthorized innovations believed to facilitate franchisee success.

H4: Franchisee trusting beliefs in the franchisor are negatively related to non-compliance with franchisor directives.

H4a: Franchisee trusting belief in franchisor competence is negatively related to non-compliance with franchisor directives.

H4b: Franchisee trusting belief in franchisor honesty is negatively related to non-compliance with franchisor directives.


Hypotheses: The Role of Trusting Beliefs in Shaping Key Franchisee Attitudes

Organizational Identification. Franchisee identification with the franchisor depends on

trust. Trust develops into emotional identification with the other as the parties’ values or beliefs

converge over time. Through repeated positive experiences, the relationship can deepen into

“identification-based” trust (Lewicki and Bunker, 1996; Shapiro et al., 1992) in which parties

identify strongly with each other. Identification occurs in organizations as people develop trust

that results in value congruence (Sitkin and Roth, 1993). Thus, franchisees who perceive that

competence and honesty are valuable will identify with franchisors who demonstrate those

values.

H5: Franchisee trusting beliefs in the franchisor are positively related to identification with the franchise organization.

H5a: Franchisee trusting belief in franchisor competence is positively related to identification with the franchise organization.

H5b: Franchisee trusting belief in franchisor honesty is positively related to identification with the franchise organization.

Franchisee Satisfaction. Empirical work suggests that trust is an antecedent of

satisfaction. For instance, trust has been found to lead to satisfaction in the decision-making

process (Driscoll, 1978) and to satisfaction in marketing channel relationships (Geyskens et al.,

1998). Furthermore, just as satisfaction with one’s job is considered an outcome variable

influenced by psychological states like felt responsibility (Hackman and Oldham, 1976), we

suggest that satisfaction with the franchisor is an outcome variable influenced by trust, a

psychological state. Trust is usually considered a variable that influences cooperative actions,

resulting in satisfaction (Deutsch, 1973). Satisfaction is probably more closely related to trust

and relations than to contracts, because contracts leave room for interpretation.


Based on this foundation, it makes sense that a franchisee who trusts franchisor

competence and honesty will be more satisfied with the franchisor because the more highly one

believes in a partner’s competence and honesty, the more one will be satisfied with the partner.

Trusting belief in franchisor competence, which is based on experience with the franchisor, will

influence franchisee satisfaction with franchisor product implementations, marketing plans, and

investment strategies. Within the contractual setting, positive experiences that relate to franchisor

ability will produce positive trusting belief-competence, which will increase satisfaction with the

franchisor. Positive experiences related to franchisor ethics will produce trusting belief-honesty,

which will increase satisfaction.

H6: Franchisee trusting beliefs in the franchisor are positively related to overall franchisee satisfaction with the franchisor.

H6a: Franchisee trusting belief in franchisor competence is positively related to overall franchisee satisfaction with the franchisor.

H6b: Franchisee trusting belief in franchisor honesty is positively related to overall franchisee satisfaction with the franchisor.

Perceived Franchisor-Franchisee Relationship Quality. Quality relationships occur when

parties are able to maintain harmony with each other as each performs his or her respective roles.

Trust promotes relational harmony because it enables parties to communicate effectively

(Golembiewski and McConkie, 1975). Additionally, trust reduces transaction costs and fosters

harmony by enabling parties to resolve conflicts and by reducing anxiety about opportunism

(Bromiley and Cummings, 1995). Low trust would involve suspicion of the other party, which

produces disharmony, defensive actions (Tyler and Kramer, 1996), and the inability to resolve

differences amicably. High franchisee trusting belief in the franchisor would enable positive

conflict resolution, which would indicate a quality relationship (Brown and Dev, 1997). Trust

should produce harmony in a relationship because it increases confidence that partners will


cooperate (Jones and George, 1998). Both trust beliefs will probably improve perceived

relational quality significantly, though one may be more predictive than another, as McAllister

(1995) found.

We would expect that trusting belief in franchisor competence would reduce franchisee

suspicion and the potential for unresolvable conflict, thereby improving perceived relationship

quality. Franchisees who trust the franchisor to make competent decisions should be less likely

to question franchisor directives, which ameliorates conflict. We would also expect that trusting

belief in franchisor honesty would reduce anxiety about opportunism and improve

communication and cooperation to resolve conflict.

H7: Franchisee trusting beliefs in the franchisor are positively related to the overall perceived quality of the relationship with the franchisor.

H7a: Franchisee trusting belief in franchisor competence is positively related to the overall perceived quality of the relationship with the franchisor.

H7b: Franchisee trusting belief in franchisor honesty is positively related to the overall perceived quality of the relationship with the franchisor.

Research Method

Unit of Analysis and Sample

The unit of analysis is the individual franchisee. Data were collected via a survey mailed

to 752 franchisees. Survey respondents belonged to one of eight franchise organizations that

agreed, at the franchisor level, to participate. Franchise organizations invited to participate

included food service firms headquartered in the USA with fewer than 500 franchisees each as of

October 2000. Smaller franchise organizations in a single industry were targeted as participants

to gain a more homogeneous sample. Invitations to participate were extended to franchise

organizations on the basis of convenience. In other words, any franchise organization that

indicated a willingness to participate by providing a mailing list of franchisees before the date


the survey was to be mailed became a participating organization. In exchange for their

participation, franchisors received a brief executive summary of the findings and key results. The

mail survey sample consisted of all US franchisees from the participating franchise

organizations, except in one instance where the number of franchise owners was over 300. (For

consistency, in one organization, a sole franchisee operating in Israel was excluded from the

study.) In this case, the survey was mailed to all franchisees in a particular region in order to

sample a comparable number of franchisees found in the other chains. At the end of the initial

data collection period, 70 completed surveys were received.

As part of the informed consent form mailed with the survey instrument, franchisees were

informed of the franchisor’s participation in the study and that their organizations would receive

a report containing the findings of the study. Franchisees were also informed that individual

responses would remain anonymous and confidential, and that results would only be presented in

summary form.

To improve response and to analyze non-response bias, we did follow-up telephone calls

to franchisees, contacting 53 franchisees. Reasons for not participating in the survey included

lack of interest, time constraints, family illness, and privacy concerns. Of the individuals

contacted, 45 agreed to participate in the survey provided a second survey was sent to them; 27

responded to this survey. Overall, 97 surveys were received, for a 13% response rate. Five of the

97 were excluded from the analysis due to missing data. T-tests showed no significant

differences in either demographic or attitudinal data between the early and non-responding

franchisees (i.e., those responding after follow-up calls).


Measures

Length of Time as a Franchisee. Length of time as a franchisee refers to the duration of

the franchisee’s tenure with the organization as an owner of a franchise. A single indicator

represented the construct: “How long have you been a franchisee?” (number of years and

months).

Perceived Mutual Commitment to the Relationship. Perceived mutual commitment to the

relationship refers to the franchisee’s perception of mutual commitment to the franchise

relationship, or, in other words, the franchisee’s perception that both the franchisor and the

franchisee are committed to the long-term preservation of the relationship. To measure this, we

used an established subscale for mutual preservation of the relationship (Brown and Dev, 1997)

as a proxy for commitment. The original subscale included five Likert scale items, shown in the

appendix. The final model included two adapted items (Table 1). The other three were dropped

because they did not load on the construct: “I expected my relationship with the franchisor to last

a long time”; “My franchisor and I are committed to the preservation of a good working

relationship”; and “Both my franchisor and I work hard at cultivating a good working

relationship.”

Trusting Beliefs in the Franchisor. Two dimensions of trusting beliefs – competence and

honesty – were included in the model. Five-point scale items were built after a review of such

scales in the trust literature, such as Cummings and Bromiley (1996), Johnson-George and Swap

(1982), Rempel et al. (1985), Tyler and Degoey (1996). We also reviewed Wrightsman (1991).

The items were pretested with students in three rounds, with slight wording modifications at each

round. We expected that these scales would either merge into one construct, as sometimes occurs


with trust items, or separate between competence and honesty. The honesty items factored

separately. Hence, trust is represented as two constructs.

Organizational Identification. The organizational identification scale developed by Mael

and Ashforth (1992) was adapted for the franchise context. The five-item scale (see appendix) or

variations of it have been used in previous studies, including research on antecedents to

identification in the military (Mael and Ashforth, 1995; = .74), and communication patterns as

determinants of identification in virtual organizations (Wiesenfeld et al., 1999; = .86). In our

study, three items did not load and were dropped: “I am very interested in what others think

about the franchisor”; “When I talk about the franchisor, I usually say “we” rather than “they”;

and “The franchisor’s successes are my successes.” The final items are shown in Table 1.

Compliance and Non-Compliance. Compliance and non-compliance factored into two

distinct constructs. Compliance measures were five-point Likert scale items in which the

franchisee indicated how often he or she implemented franchisor directives or initiatives related

to product, operations, equipment, and technology. Non-compliance measures consisted of five-

point Likert scale items in which the franchisee indicated whether or not he/she implemented

innovations that were not approved by the franchisor. Both measures were developed for this

study.

Satisfaction with the Franchisor. Three Likert scale items were derived for the franchise

context from the twenty-item short form the Minnesota Job Satisfaction Questionnaire (Weiss et

al., 1967). Morrison (1997) had adapted this questionnaire to measure franchisee satisfaction in

previous research. The three items chosen were those related specifically to satisfaction with the

franchisor, and not other job related factors, such as satisfaction with hours worked or tasks

performed by the franchisee.


Perceived Relationship Quality. A three-item scale was adapted from Brown and Dev’s

(1997) measure of the franchisee’s perception of franchisor-franchisee relationship quality in the

lodging industry. The items were derived from a subscale related to the perceived atmosphere of

cooperation and harmonization of conflict.

Data Analysis

All hypotheses were tested using partial least squares (PLS), which is frequently used for

research with moderate sample sizes and/or complex models that emphasize predicting causality

(Joreskog and Wold, 1982). PLS is a structural path estimation approach that models the

relationships among multiple variables, has the capability of working with unobservable latent

variables, and accounts for measurement error in the development of latent constructs (Chin,

1998).

PLS’s approach differs from LISREL. The latter uses a covariance-based approach,

which means path coefficients are calculated by minimizing the differences between the sample

covariances and those predicted by the theoretical model. PLS uses a component-based

approach, similar to principal components factor analysis (Compeau et al., 1999), which

calculates the loadings between items and constructs and the regression coefficients between

constructs. The covariance-based approach assumes multivariate normality, whereas the

component-based approach does not (Wold, 1982). Thus, PLS is preferable to covariance-based

approaches when multivariate normality is not demonstrated. PLS is also better suited for our

analysis than multiple regression. Regression, like LISREL, requires multivariate normality. In

addition, PLS accounts for measurement error, whereas multiple regression does not.

PLS adopts Anderson and Gerbing’s (1988) two-step approach to analysis. First, a

measurement model is evaluated to determine the validity and reliability of the measures.


Second, after the measurement model is accepted, a structural model is evaluated to determine

the relationships among the constructs. The measurement model assesses how well the individual

items measure the latent construct that they were intended to measure. The measurement model

was evaluated based on the individual item loadings, reliability coefficients, and discriminant

validity.

Individual item loadings should, ideally, be above 0.70, but loadings above 0.50 “may

still be acceptable if there exist additional indicators in the block” (Chin, 1998, p. 325) of items

for a particular construct. Reliability scores should also be above 0.70 (Fornell and Larcker,

1981). Average variance extracted (AVE), which measures the amount of variance captured by

the indicators of a construct versus the amount of variance caused by measurement error (Chin,

1998), should be above 0.50 (Fornell and Larcker, 1981). This would indicate that more than half

of the variance is accounted for by the construct. Acceptability against these standards indicates

convergent validity.

Discriminant validity is assessed by evaluating cross-loadings and AVE (e.g., Compeau

et al., 1999). First, items should load higher on their intended constructs than on any other

construct in the model (Chin, 1998). Second, each latent variable inter-correlation should be less

than the square root of its corresponding AVE. The hypotheses are tested by evaluating the

statistical significance of the path coefficients in the structural model, which are standardized

betas (Compeau et al., 1999). Unlike covariance-based approaches, PLS produces no model fit

indices. The structural model was created using a bootstrap approach.Results

Measurement Model Validity

The individual item loadings and AVEs for the model are shown in Table 1. All loadings

are above 0.50 with at least one item per construct above 0.70, which supports the convergent


validity of the measurement model. AVEs for each of the latent constructs were above 0.50. The

items are also reliable measures. Internal composite reliabilities (ICRs) for each scale, shown in

Table 2, are all above 0.70.

Discriminant validity is demonstrated when the square root of the AVE for a construct

(shown on Table 2) is greater than the correlations between that construct and the other

constructs in the model. This condition held for all constructs. The correlation matrix can be

found in Table 2.

__________________________________

[Insert Table 1 about here.]

__________________________________

__________________________________

[Insert Table 2 about here.]

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Structural Model

The structural model (Figure 2) was assessed by evaluating the path coefficients. Overall,

one or more trust variables influenced identification, non-compliance, satisfaction, and perceived

relationship quality. H1a, which postulates that time spent as a franchisee will be positively

related to trusting beliefs in the franchisor, was not supported, because length of time as a

franchisee did not affect either competence or honesty belief. Hence, H1b was supported. H2,

proposing that perceived mutual commitment affects trust, was fully supported. There was partial

support for H4 and H5, which hypothesize that trusting beliefs in the franchisor is negatively

related to non-compliance and positively related to identification. H3, which posits that trusting

beliefs in the franchisor is positively related to franchisee compliance, was not supported. H6 and


H7, which relate trusting beliefs to satisfaction and perceived relationship quality, were fully

supported.

__________________________________

[Insert Figure 2 about here.]

__________________________________

Discussion

Antecedents of Trusting Beliefs

The results increase understanding of how franchising relationships work. First, the

length of time as a franchisee – a form of familiarity (Bigley and Pearce, 1998) – affected neither

dimension of trusting beliefs. To understand this better, we divided the data into four groups,

based on tenure as a franchisee. The least experienced quadrant had mean competence and

honesty trusting belief levels of 2.16 and 2.23, which are not significantly different from the

construct means of 2.29 and 2.02. This finding indicates that trust does not necessarily begin low

and grow slowly over time, nor does it begin high and decline. In fact, the data suggest that

average trust levels remained steady across experience levels. Rather than supporting traditional

trust theory, this tends to support recent theory (e.g., McKnight et al., 1998; Meyerson et al.,

1996), which suggests that trust does not necessarily grow gradually over time.

Perceived mutual commitment to the relationship was an effective trusting belief builder,

for both competence and honesty, and was much more predictive than was length of time as a

franchisee. It appears that long-term, the franchisee belief that both parties see the relationship

extending into the future helps build trusting belief. The commitment construct items indicate

that the franchisee really wants the relationship to continue and is convinced that the franchisor

has similar objectives. Therefore, commitment is perceived by the franchisee to be mutual, which


is key to building trust. Instinctively, people feel that trust makes a relationship work, and

therefore, perceptions of mutual commitment strongly influence their trust levels. Those with

high perceived mutual commitment (including an expectation of contract renewal) develop high

trust in the other, while those with low perceived mutual commitment do not. For example, if

either the franchisee or the franchisor expected to terminate the relationship after the contract

period, then trust would tend to be low. The combined results of Hypotheses 1 and 2 suggest

that, on average, the “shadow of the future” has a greater effect on trust levels than does the

length of time (experience) among parties. Experiential quality may also have an effect, but this

was not measured.

With respect to antecedents of trust, a post hoc analysis was performed to clarify the

relationship between perceived franchisee commitment and trust. Since franchisees signed their

contracts prior to completing our survey, it may be possible to use contract length as a

longitudinal proxy for commitment. We found contract length and perceived mutual commitment

to be positively correlated (.251, p < .05), so this appeared to be a reasonable strategy. An

additional PLS model was constructed in which contract length was substituted for commitment.

The path between contract length and trusting belief-competence was not significant. The path

between contract length and trusting belief-honesty was significant at the .05 level; however, the

R2 was very low (below < .07). These results partially support that the idea that commitment

leads to trust, rather than the reverse. Nonetheless, comparing the low R2 of this alternate model

with that of the study’s model suggests that psychological felt commitment is a stronger driver of

trust than length of contractual commitment.

The Role of Trust in Reducing Opportunistic Behavior


The franchisee compliance and non-compliance results provide an interesting contrast,

with the latter strongly influenced by trust in franchisor competence but the former not

influenced. Thus, while governance by trust may not be needed to ensure compliance, trust is

strongly related to the reduction of non-compliant opportunistic behavior, which may undermine

the franchisor’s brand equity and system uniformity. Assuming that governance mechanisms are

not mutually exclusive, but rather can be employed simultaneously with synergistic effects

(Bradach and Eccles, 1989; Poppo and Zenger, 2002), we speculate, based on the results, that the

authority of the contract may be enough to safeguard the exchange to the extent that directives

are explicitly specified, but that perceived franchisee trust may be necessary to avoid

opportunistic interpretations of more ambiguous areas. Relational contract theory recognizes that

contracts, such as franchise contracts, have elements of discrete exchange that can be specified

and other elements that cannot, and theory suggests that relational governance mechanisms may

arise (Macneil, 1980). Therefore, it makes sense that trust can be developed by franchisors as a

way to reduce opportunistic behavior in areas of the relationship that are not covered by the

contract.

Although the predicted relationship between trusting belief-competence and non-

compliance was maintained, it did not hold between trusting belief-honesty and either

compliance or non-compliance. Perhaps trusting belief-honesty does not matter, or that the

effects of competence belief mask the effects of honesty belief. To explore this, we conducted a

post-hoc analysis in which the paths between trusting belief-competence and both compliance

and non-compliance were omitted from the model. In this case, no significant relationship

between trusting belief-honesty and noncompliance was found (=.158, t=1.21), but there was a

significant positive relationship found between trusting belief-honesty and compliance (=.332,


t=3.13). It is possible, therefore, that honesty perceptions are needed for compliance, but that

competence perceptions mask the effects of honesty perceptions. On the other hand, in

combination with our original findings, this suggests that trusting belief in franchisor

competence is much more important than trusting belief in franchisor honesty in minimizing

opportunistic behavior. Clearly, teasing out the effects of trust in various franchisor attributes –

competence and honesty as well as others, such as benevolence – is an area where future

research is needed.

The Role of Trusting Beliefs in Shaping Key Franchisee Attitudes

The franchisee’s trusting belief in the franchisor’s competence positively affected

identification with the franchisor while trusting belief-honesty did not. Apparently, the question

of franchisor honesty, an ethical issue, has a lesser impact on franchisee identification with the

franchisor, whereas franchisor competence was key. The efficacy of trusting belief in the

competence of the franchisor is also indicated by its strong links to perceived relationship quality

and satisfaction.

The measures for perceived relationship quality have to do with relational harmony and

conflict resolution. The significant relationship between both trusting beliefs and perceived

relational quality thus shows that trusting beliefs act as a good social lubricant, providing a

cooperative atmosphere for resolving disagreements and conflicts. This corresponds with the

literature on the conflict-resolving nature of trust (Axelrod, 1984; Deutsch, 1973; Fukuyama,

1995; Lewicki and Bunker, 1996; Shapiro et al., 1992).

Similarly, trusting beliefs lead to franchisee satisfaction with the franchisor. As

interaction occurs over various issues, trusting beliefs are clearly needed for the parties to be

satisfied with each other. Trusting beliefs would increase franchisee satisfaction by consolidating


past experience with the franchisor into future expectations that the franchisor will act in

competent and honest ways. Few studies have made this linkage, but it seems an important one,

since satisfaction with the franchisor is a driver of unit performance (Morrison, 1997). With both

perceived relationship quality and satisfaction, trusting belief-competence was the more salient

factor, again underlining how critical are perceptions of franchisor competence. Overall, the

model test indicates that trust shapes key franchisee attitudes about the relationship with the

franchisor.

Does Trust Matter?

At the outset, we established two purposes for this study. The first was to determine the

extent to which trust safeguards exchanges by reducing incentives to behave opportunistically.

We demonstrated that trusting belief in franchisor competence does reduce opportunistic non-

compliance, while trusting belief-honesty does not. On the other hand, neither trusting belief

affected compliance with franchisor directives. The second purpose was to establish the extent to

which trust facilitates the development of positive franchisee attitudes towards the franchisor

(satisfaction and perceived relationship quality), which has also been demonstrated. In these

ways, trust matters.

The paper also contributes by showing that franchisee perceived mutual commitment

strongly influences trusting beliefs in the franchisor, while length of time as a franchisee does

not. Even though a significant amount of the literature says that trust tends to grow over time,

our results show that trust does not necessarily do so. This result supports the literature that says

trust forms quickly rather than incrementally (e.g., Meyerson et al., 1996). This is only one piece

of evidence and much more needs to be explained.


When we first introduced the constructs, we provided literature support for positive links

between five franchisee behaviors/attitudes and franchise performance, but we did not

empirically test these. Hence, the question of whether trust indirectly influences performance

remains open (Zaheer et al., 1998).

In addition to the theoretical perspectives offered earlier, we conducted a post-hoc

analysis to support the argument that trust does affect performance through relationship quality.

As part of a related study, pre-survey interviews were done with two franchisees from each of

the eight franchise organizations represented in this study. In the interviews, franchisees were

asked to rank the quality of their franchisor relationships overall (1=poor, 7=excellent). To assess

the linkage between franchisee perceived relationship quality and overall franchisor

performance, we examined unit growth of the franchisors from 1999 (pre-survey) to 2004 (post-

survey). Unit growth has been suggested as a primary strategic objective of franchisors with

higher levels of unit growth and a useful indicator of successful franchisors (Bradach, 1998). For

this post-hoc analysis, we collected data on the number of units in each of the eight chains in

1999 and 2004, using published data from Bond’s Franchise Guide (1999; 2004). From this data,

we calculated a five-year growth rate, which categorized the organizations. We placed the top

four fastest-growing organizations in a high growth group and the bottom four in a low growth

group. Averaging the two franchisee scores from each organization, we conducted an analysis of

variance (ANOVA), and found a significant difference in perceptions of relationship quality

between the high and low growth rate groups (F=4.60, p=.001). Descriptive statistics for this

analysis can be found in Table 3. Although this analysis may not be representative of the general

franchise population, it provides some evidence that the quality of the franchisee relationship

tends to affect overall franchisor performance.


To offer qualitative support for our argument, we also drew upon additional pre-survey

interviews of two franchisor representatives of each of our eight franchisors. In some cases,

franchisor representatives indicated that the franchisee relationships do matter, and that nurturing

them is a corporate objective. One franchise executive reports: “There’s the ability to build

relationships and work through perhaps any issues before there can be hard feelings, if you will,

or feeling of neglect.” Another says: “We’ve been working very intently in the past year to

improve our relationships.” The impact on the bottom line is also recognized: “We have gone

through several different management changes, sales [and] profit declines. We’ve had a lot of

relationship problems with franchisees historically.” Further research on the relationship between

franchisee attitudes and performance is warranted.

Relational contract theory suggests that trust can act as either a substitute for contracts or

as a complementary governance mechanism (Poppo and Zenger, 2002). Contracts and trust have

been portrayed as either antithetical to each other or overlapping each other (Bennett and

Robson, 2004). This study takes a different approach by examining the extent to which trust

makes a difference within a pre-existing contractual franchise relationship. We found evidence

that trust in the competence of the franchisor reduces the extent to which the franchisee

implements innovations not approved by the franchisor, which is a form of opportunistic

behavior. We also found that trust in a contractual setting strongly influences the franchisee’s

perception of the quality of the relationship with the franchisor in terms of resolving

disagreements and being mutually responsive. This finding builds on relational contract theory

by implying that complex, detailed issues that are not easily governed by a long-term contract

may be handled through norms of mutual trust, which presumably reduces transaction costs

among the parties (Poppo and Zenger, 2002). This does not say the contract is not important.


Rather, it says that even given the favorable, protective effects of the contract, trust has an

influence on franchisee satisfaction with the franchisor and perceived relationship quality. It also

reduces noncompliance with franchisor directives.

On the other hand, trust had no effect on compliance, which we speculate means the

effects of the contract were sufficient to ensure compliant franchisee behavior. In other words,

the franchisee complied because of contractual commitment and not because of trust in the

franchisor. Perhaps this also implies that if the contract had provided sufficient effects on the

other dependent variables, trust would have little effect on them. For example, if the contract had

been a sufficient assurance of relationship quality and satisfaction with the franchisor, then trust

would not have predicted satisfaction and relationship quality so strongly. Thus, although this

study does not directly compare relational governance with contractual governance, it does show

that within a strong contractual relationship, trust is a factor of importance. The strength of trust

is especially important to satisfaction and perceived relationship quality. This is based on the

high percentage of variance in these outcomes explained by trust (57%-58%). The overall effects

of trust are important, in part, because the franchise contract has been shown, in some ways, to

increase free riding and reduce quality (Michael, 2000).

Limitations and Additional Areas for Future Research

An opportunity that this study does not pursue is the analysis of interaction effects of

various governance mechanisms. In fact, some of the effects we ascribe to trust may have

resulted from other governance mechanisms not studied here. Relationships between contracts

and trust (Poppo and Zenger, 2002) were addressed in our discussion on reducing opportunistic

behavior, but these and additional interactions, such as between hierarchical controls and trust,

should also be studied. Alternative governance mechanisms and their interactions with trust also


offer opportunities for additional study. For example, in business relationships, reputation may

be an alternative governance mechanism to trust (Alvarez et al., 2003; Bennett and Robson,

2004). Reputation of the franchisor needs more investigation.

Another limitation of the study was that we did not explicitly measure franchisee

performance. Although our dependent variables were theoretically linked to performance,

empirical tests should be conducted to decipher the extent to which they make a difference in the

franchising operation. Longitudinal studies should also be conducted to assess how trust and the

dependent variables interact over time. A further limitation is that only one trust building factor

had an effect. Others should be examined, such as structural assurances (Shapiro, 1987). An

additional limitation arises from the measurement of trust in the franchisor organization as

opposed to trust in individual people, making it difficult to determine exactly who in the

franchisor organization produced franchisee trust perceptions. Only by looking at trust in

franchisor/franchisee boundary spanners (e.g., Zaheer et al., 1998) can a complete understanding

of the franchise trust phenomenon be developed. Our sample was also limited because it

included only US franchisees. Since trust may vary across national cultures (Fukuyama, 1995;

Yamagishi and Yamagishi, 1994), and its effects are contextual (Bennett and Robson, 2004),

future research should also examine the effects of cultural differences on trust development in

the franchise context. The study was also limited because the number of responses did not allow

us to analyze franchisor fixed effects in the model. Finally, because the data is cross-sectional,

we cannot prove that the direction of causality is not the reverse for some of the proposed

linkages. For example, it is possible in the long run for satisfaction to affect trust levels.

Although we found more support in the literature for a link from trust to satisfaction, future

research should address whether satisfaction leads to trust.


Implications for Practice

Franchisors should be interested to know that the trust they build among franchisees has

significant relational payback. Franchisees with high trust are more likely to identify with the

franchisor, which may be important in preserving reputation and brand equity, are less likely to

engage in opportunistic non-compliant behavior, are more likely to resolve conflicts peacefully,

and are more satisfied with the franchisor. Each of these is an indicator of a healthy relationship

and success among partners. In light of the natural conflicts built into the franchise model, high

levels of trust are important to relationship success.

Therefore, franchisors should do whatever they can to build trust. This study indicates

they should try to develop franchisee perceptions that both parties want the relationship to

continue into the future. They should also communicate well and frequently with franchisees,

develop well-conceived marketing plans and product introductions to demonstrate competence,

and operate the organization openly and honestly. Although not studied here, benevolence (the

opposite of opportunism) is another trust attribute that franchisors can emphasize by showing

that franchisee profitability is as important to the franchisor as system-wide sales growth.

The results provide evidence that trust leads to the kind of franchisee/franchisor

relationship that should improve franchise organization performance a variety of ways. We

speculate that an enhanced relationship may help preserve the organization’s brand equity and

improve financial performance. For example, the divergent effects of trust on franchisee

compliance and non-compliance may indicate that franchisees are poised to strike a healthy

balance between uniformity and local responsiveness. The effects of trust on perceived

relationship quality and franchisee satisfaction are possible indicators that the franchise

organization is ready for orderly internal unit growth and that franchisees would be willing to


implement new programs and ideas from the franchisor, enhancing chances for innovation

diffusion. Hence, franchisors should build franchisee trusting beliefs because they will lead to

the kinds of relationship attitudes and behaviors that will address strategic imperatives.

Conclusion

This study produces a new model of the role of two trusting beliefs that provide relational

governance within a structured contractual setting. First, we set out to determine the extent to

which trusting beliefs help safeguard franchise exchanges by reducing incentives to behave

opportunistically. Trusting belief-competence negatively influences franchisee non-compliance,

but does not influence compliance. Second, we demonstrated that in the contractual setting

trusting beliefs help shape two franchisee attitudes: satisfaction with the franchisor and perceived

relationship quality. Based on past research, the non-compliance, satisfaction, and relationship

quality variables predicted by trusting beliefs influence the overall performance of franchise

organizations. Overall, our findings support the idea that trust helps franchisees cope with some

of the uncertainty gaps that contracts leave behind (Macneil, 1980; Poppo and Zenger, 2002).

Further, the model suggests that building perceptions among franchisees in favor of mutual long-

term commitment is a significant way to build franchisee trusting beliefs in the franchisor. The

study contributes to theory by exploring trusting beliefs as a governance mechanism that

operates even when contracts and hierarchy in the franchise context already minimizes free

riding and nurtures positive franchisee-franchisor relations.


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Table 1

Measurement model

Construct Anchors Item Mean SD Loadings Weights AVE1

Perceived Mutual Commitment

1= Strongly Agree, 5= Strongly Disagree

Both my franchisor and I think it is important to continue our relationship.

1.74 0.77 .7983 .4297

.752Both my franchisor and I consider the preservation of our relationship to be important. 1.70 0.74 .9305 .7061

Trusting Belief in Franchisor Competence


My franchisor is skillful and effective in its work. 2.34 0.96 .9238 .2876

.796My franchisor performs its work very well. 2.39 0.88 .9153 .2903

Overall, I have a capable and proficient franchisor. 2.24 0.88 .9283 .3084

Overall, my franchisor is competent technically. 2.33 0.93 .7933 .2298

Trusting Belief in Franchisor Honesty


My franchisor is honest in its dealings with me. 2.05 0.84 .9504 .6098.867

I could expect my franchisor to tell the truth. 1.99 0.88 .9116 .4613

1 AVE is the Average Variance Extracted, defined as the amount of variance captured by the indictors of a construct relative to the amount of variance caused by the measurement error (Fornell and Larcker 1981).


Compliance 1= Almost Never,5= Almost Always

When the franchisor introduces a new product (e.g., sandwich), I add the new product to my menu. 3.86 1.25 .7895 .3469

.594

When the franchisor introduces a new product line (e.g., bottled beverage line), I add the new product line to my menu.

3.72 1.38 .7916 .2664

When the franchisor introduces new equipment (e.g., stove, refrigerated case), I buy the new equipment.

2.88 1.32 .7974 .3187

When the franchisor introduces new technology (e.g., computerized point-of-sale system), I implement the new technology.

2.95 1.20 .7000 .3730

Non-compliance


I implement product/product line/service innovations that are not approved by the franchisor.

3.67 1.23 .8072 .2944

.752I implement operational innovations that are not approved by the franchisor.

3.47 1.25 .8952 .3488

I implement marketing innovations that are not approved by the franchisor. 3.46 1.23 .8990 .5007


Identification 1= Strongly Agree, 5= Strongly Disagree

When someone criticizes the franchisor, it feels like a personal insult.

2.70 1.15 .9276 .5944 .832

When someone praises the franchisor, it feels like a personal compliment. 2.20 1.03 .8963 .5005

Satisfaction 1= Strongly Agree, 5= Strongly Disagree

As a franchisee, I am satisfied with the way the franchisor handles its franchisees.

2.55 1.08 .8975 .4254

.695As a franchisee, I am satisfied with the competence of the franchisor in making decisions.

2.73 1.06 .9141 .4551

As a franchisee, I am satisfied with the way franchisor policies are put into practice. 2.70 0.95 .6656 .3038

Perceived Relationship Quality


Both the franchisor and I are generally able to resolve disagreements to both parties’ satisfaction.

2.04 0.94 .8638 .3769

.783My franchisor and I are very conscientious, responsive, and resourceful in maintaining a cooperative relationship.

1.96 0.89 .9076 .3975

Both parties try to resolve disagreements that arise between us in good faith. 2.02 0.91 .8777 .3552


Table 2

Internal composite reliabilities and correlations of latent constructs

Construct ICR TBC TBH NC ID COM RQ SAT CMIT


.94 .89


.93 .60 .93

Non-compliance .90 -.47 -.14 .87

Identification .90 .36 .30 -.11 .91

Compliance .81 .32 .26 -.36 .31 .77

Relationship Quality .91 .68 .67 -.29 .42 .39 .88

Satisfaction .87 .72 .64 -.34 .34 .31 .77 .83

Commitment .87 .63 .58 -.21 .32 .37 .80 .61 .87

Note: Diagonal elements in the correlation matrix are the square roots of the AVEs.

Column Headings: ICR = Internal Composite Reliability; TBC = Trusting Belief-Competence; TBH = Trusting Belief-Honesty; NC = Non-compliance with Franchisor; ID = Identification with Franchisor; COM = Compliance with Franchisor; RQ = Perceived Relationship Quality; SAT = Satisfaction with Franchisor; CMIT = Perceived Mutual Commitment


Table 3

Descriptive statistics: Post hoc analysis of linkage between franchisee attitudes and performance

Group Variable Mean

Standard

Deviation

Low

Unit Growth

5-Year Unit Growth Rate 6.4% 14.5%

Average Franchisee Perception of

Relationship Quality

(1=poor, 7=excellent)

4.5 2.48

High

Unit Growth

5-Year Unit Growth Rate 86.5% 51.9%

Average Franchisee Perception of

Relationship Quality

(1=poor, 7=excellent)

6.1 .83


Figure 1

Research model

.

H7b

3a

H6b

3a

H5b

3a

H4b

3a

H7a

H6a

H5a

H4a

H3b

H3a

H1a2, H1b2

H2a

H2b

H1a1, H1b1

Length of Time as a Franchisee




Compliance with FranchisorDirectives

Non-Compliance with FranchisorDirectives

Identification with Franchisor

Satisfaction with Franchisor

Perceived Relationship Quality

Franchise Perfor-mance


Figure 2

Structural model

Legend:

n.s.

* p < .05

** p < .01

.53**

.41**

.32**

.13

-.22

.44**

.29*

-.59**

.10

.26

.02

.62**

.59**

.08Length of Time as a Franchisee


Trusting Belief in Franchisor CompetenceR2 = .39

Trusting Belief in Franchisor HonestyR2 = .34

Compliance with FranchisorDirectives R2 = .11

Non-Compliance with FranchisorDirectives R2 = .25

Identification with Franchisor

R2 = .14

Satisfaction with FranchisorR2 = .58

Perceived Relationship Quality R2 = .57

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