Franchising provides an increasingly important vehicle for entrepreneurial wealth creation and accounts for a large and growing share of business in the retail and service sectors. Chains—which operate in dispersed markets—most frequently use this form of governance. These firms must balance the centralization and standardization required for efficiency with the adaptation needed for success in varied local markets. By adopting an organizational learning perspective, we argue that the mix of company-owned and franchised units affects this balance, thereby influencing chain performance. In particular, the different incentives facing company managers and the entrepreneurs that manage franchises encourage distinct patterns of organizational learning. Franchised establishments provide better opportunities for the firm to learn through experimentation; however, companies find it easier to diffuse this information and enforce standards through their company-owned units. Analyses of franchised restaurant chains in the United States provide empirical evidence of this trade-off.
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