Transaction costs influencing international hotel franchise agreements: The case of the Holiday Inn Seoul

Abstract

Although transaction cost analysis is important for both the franchisor and the franchisee, insight into a franchisee’s perspectives in relation to transaction costs has been lacking in the literature on franchise agreements. However, this perspective is becoming important in the hotel industry since, from the viewpoint of franchisees, the greatest issue of concern regarding franchise agreements is cost, specifically when they convert their independent local hotel and put it under the umbrella of an international hotel chain. This study introduces a framework for transaction costs such as transaction-specific assets, environmental uncertainty, and behavior uncertainty in the context of the hotel industry. In addition, by employing a sample hotel this study illustrates the evaluations of transaction costs resulting from in-depth interviews of the top executives of the hotel. It was found that the sample hotel experienced various transaction costs beyond the traditional direct costs. The framework of transaction costs introduced can help international hotel franchise companies to understand the characteristics of each type of transaction cost that potential franchisees consider important. In addition, the evaluations illustrated through a sample hotel in this study can also help international hotel franchise companies to benchmark franchise agreements.