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Exploring the differences between franchisee entrepreneurs and nascent
entrepreneurs
Article in International Entrepreneurship and Management Journal · December 2007
DOI: 10.1007/s11365-007-0045-0
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Int Entrep Manag J
DOI 10.1007/s11365-007-0045-0
Exploring the differences between franchisee
entrepreneurs and nascent entrepreneurs
Marc Sardy & Ilan Alon
# Springer Science + Business Media, LLC 2007
Abstract This paper is singular in its use of the PSED dataset for deriving a better
understanding of the nature of nascent entrepreneurs as compared to franchisee
entrepreneurs. We used previous studies on the differences between the two groups
and developed variables divided into three dimensions: (1) prior experience, (2)
growth objectives, and (3) motivation and risk. Jonckheere–Terpstra (J–T) tests, ChiSquare tests, F-tests and logistic regression models detected differences in all three
dimensions. The conclusion is that franchisee entrepreneurs in the United States of
America are distinctive in their characteristics. As compared to nascent entrepreneurs, franchisee entrepreneurs have less experience, less confidence in their skills,
less capital, more aspirations for larger organizations, less confidence in their
abilities to make the business a success, and more belief that their first-year incomes
will be stable.
Keywords Franchisees . Nascent entrepreneurs . PSED database . Startup survey
This study makes a singular contribution to the literature by being the first to analyze
the differences between nascent entrepreneurs and franchisees using the Panel Study
of Entrepreneurial Dynamics (PSED) national database of the United States of
America. The PSED, developed through the Entrepreneurship Research Consortium,
was one of the most comprehensive studies ever completed on nascent entrepreneurs.
Entrepreneurs and franchisees are often considered different in relationship to
risky startup ventures. The popular culture image of an entrepreneur denotes a
person who is willing to take large risks on uncertain ventures on the chance that he
M. Sardy
Department of International Business, Rollins College, 1000 Holt Ave, Winter Park, FL 32789, USA
e-mail: msardy@rollins.edu
I. Alon (*)
Petters Chair of International Business, Rollins College, 1000 Holt Ave-2722, Winter Park,
FL 32789, USA
e-mail: ialon@rollins.edu
Int Entrep Manag J
or she will create something original and sustainable. Franchisees have a slightly
different image of themselves since they become partners in an already established
business model and attempt to develop it to sustainability through the institutional
wisdom of the franchisor. Franchises are arrangements that let a person or team start
a business using the name and standards of a parent corporation. Franchises combine
the advantages of a large corporation with those of a sole proprietorship or
partnership. Therefore, franchisees can be said to be the type of entrepreneur
suggested by Hoy et al. (2000). There are multiple entrepreneurial types (Williams
1999). They range from solo, self-employed individuals to corporate entrepreneurs.
Franchisees are positioned somewhere between these two extremes (Knight 1984).
According to Kaufmann and Dant (1999), franchisees meet several of the
definitional frameworks of entrepreneurship: Liebenstein’s (1968) framework
through risk taking, leadership, motivation and ability to meet crises; Low and
MacMillan’s (1988) and Gartner’s (1985) frameworks through creation of new
enterprises; and Cole’s (1968) framework through initiation and development of
profit-oriented businesses. Franchisees receive training in how to operate the
business; they pay a fee and a percentage of income or profit to the parent
corporation.
Very few studies have examined the differences between nascent entrepreneurs
and franchisees. Research in general at the intersection of franchising and
entrepreneurship is rather limited but provides insights to the entrepreneurial
processes of franchisees. For example, Hoy et al. (2000) examined franchising as
an entrepreneurial act and using past studies rejected most popular notions that
differentiate franchisees and entrepreneurs. According to the authors, two persistent
questions that remain are whether franchisees are a permanent form or a stage in
corporate development, and whether the franchisee is a quasi-employee or
independent venture owner. To the first question they determine that at least in the
United States there appears to be a lifecycle to franchising. To the second question
they claimed that lines are not clear between franchisees and independents.
Franchisees are autonomous in many ways. They may be controlled through
franchise agreements but they still own the business, at least until the agreement runs
out. Hoy et al. (2000) correctly argue that no form of enterprise is truly independent.
Knight (1984) examined the differences between Canadian franchisees and
independent entrepreneurs with respect to personal characteristics, management
skills, financing required and support services, and found that differences exist, in
part, because franchisees are less independent than other entrepreneurs are. Given
the focus of his analysis, Knight’s study is a good anchor point for comparative
purposes in our study. We examined many variables that enabled us to make
comparisons between Knight’s (1984) study and (PSED) data.
Three key differences should be pointed out between our two studies: questionnaires, time and place. Knight’s study uses a different questionnaire, is from the 1980s,
and is conducted in another country, namely Canada (compared to our USA sample).
Cultural and institutional frameworks of franchising and entrepreneurship differ
across countries (Alon 2005; Welsh et al. 2006). Falbe and Welsh (1998) studied
franchising in the North American Free Trade Area (NAFTA)—a free trade region
consisting of the United States, Canada and Mexico. The authors found mixed
results for the USA and Canada with respect to franchising success factors, but
Int Entrep Manag J
similar results for reasons for failure. If Knight’s study results and our study results
agree, then we may conclude that these three differences do not account for the
variations between franchisees and entrepreneurs.
This article proceeds as follows: the first section will discuss the model, the
variables used and the reasoning for using them. The second section will discuss the
methodology in our comparison of Knight (1984) to the PSED Data. The third
section will discuss the results of our comparison between the PSED and Knight
(1984). In the fourth section we will analyze a logistical model that we have
developed to differentiate nascent entrepreneurs from franchisees. We will conclude
with the fifth section.
The model
Our model breaks the differences and similarities between entrepreneurs and
franchisees into three functional areas: prior experience, growth objectives,
motivation and risk. Prior experience plays a role in the differences between
franchisees and nascent entrepreneurs as they may have different perceptions of
previous experience and the skills and abilities that will be required for the success
of their ventures. Growth objectives may also differ between nascent entrepreneurs
and franchisees as the franchisee should have an established business model that
requires a certain level of staffing for an effective approved business unit, while
entrepreneurs are more likely to depend on their startup teams and may have
different ideas about overall growth objectives. In our analysis, we also considered
the startup size as well as the ultimate size objective of the functional firm, whether
the goal was to create a small and manageable firm or to develop as large as business
as possible. The final dimension had more to do with motivation and risk. We
analyzed the level of risk that both groups considered, the effort they were willing to
put into the venture and the level of confidence that they exhibited in the prospects
of their future venture.
While there may be other aspects of the “startup decision,” three dimensions of
the attitudes and desires of the nascent businessperson seem to differentiate them:
prior experience, objectives for growth, motivation and risk. These dimensions
account for much of the variation among startups. The extant literature concurs with
the importance of these variables. For example, Cliff et al. (2006) and McCarthy and
Leavy (1998/1999) discuss the value of previous experience; Greenbank (2006)
and Sage (2003) discuss motivation and risk as well; and Baum et al. (1998) and
Stevenson and Jarrillo-Mossi (1986) discuss objectives as a driver for success in
entrepreneurial firms. We accept Hunter’s (2005) notion that there is a life cycle to
entrepreneurship, common to both nascent entrepreneurs and franchisees, while
Price (1999) suggests that differences between nascent entrepreneurs and franchisees
may be due to the audience that results from the way franchises are marketed.
Prior experience We hypothesized that our two groups (nascent entrepreneurs and
franchisees) based much of their decision making on the values they hold about
experience, their position on skills and abilities and the value of education. There is
little agreement in the literature on the value of prior experience, with Basu (1998)
Int Entrep Manag J
arguing the merit and Birley and Westhead (1993) arguing the opposite. Jo and Lee
(1996) take the position that lack of education related to prior experience leads to the
inconsequential merit associated with it. Wilkerson (1993) makes a case for the need
for better training of franchisees.
Previous comparisons of the prior experience of our two groups have been
displayed in minute detail in the work of researchers such as Stoner and Frey (1982).
However, there are limitations to using PSED data to mirror the original study. The
PSED was created primarily to examine the attitudes and motivations of nascent
entrepreneurs. In the course of the survey, data on franchisees were also collected.
The nature and direction of the questions were somewhat different from Stoner and
Frey’s (1982) original study. However, we have identified several survey questions
that capture similar information.
The PSED questionnaires also identified prior experience as the pragmatic skills
and abilities the subjects believed that they already possessed at startup: there was a
striking contrast between what they already believed they had to what skills they
may actually need to succeed. These skills and abilities are also distinct from those
achieved through formal education, defined operationally by the PSED as the
specific elements of education and various types of training measured by length of
time of exposure and credentials acquired.
Objectives for growth A second component of our model regards the specific goals
that groups of nascent entrepreneurs and franchisees have for their growth
objectives. We hypothesize that these goals are seen in a continuous period in
which we can identify both startup and eventuality, with its essential ingredient of
vision or futurity. According to Ottesen and Gronhaug (2005), the vision or futurity
aspect is illusory and is a key element of innovation essential to new ventures. The
goals of nascent entrepreneurs and franchisees were operationalized in our dataset by
responses to questions in which nascent entrepreneurs envisioned the size of the
startup team and its long-term growth possibilities. Kamm et al. (1990) discussed the
team’s size objectives and the importance of defining the dimensions of the venture
before expanding team membership. Specifically, the size of the team might be seen
as continuously small and manageable in future operations, or it might be envisioned
that the team would grow the venture into a very large organization. This projection
of future goals may conflict with the analytical approach used by larger firms, such
as searching for diminishing returns or increasing returns to scale or even one that
utilizes a more realistic vision that considers competitors, financing or other more
objective measures.
Motivation and risk The third and final component of our model is motivation and
risk. There is a rich and controversial literature on motivation and risk at startup.
Recent publications by both Cressy (2006) and Kincaid (2005) point out that risk is a
major determinant of startup decisions. However, research on projected failure rates
for nascent entrepreneurs and franchisees are inconsistent. Castrogiovanni et al.
(1993) argued that the failure rate for franchisees is lower than that for entrepreneurs,
while Stanworth et al. (1998) argued there were no differences. Levesque and
Minniti (2006) point out that age, wealth and risk aversion are critical to the startup
Int Entrep Manag J
Differences & Similarities
between Entrepreneurs
and Franchisees
Prior Experience
Values
Toward
Experience
Skills
and
Abilities
Growth Objectives
Education
Size
of
Team
Small
and
Manageable
Startup
And
Eventuality
Motivation and Risk
Risk
Effort
Confidence
Large
as
Possible
Fig. 1 Nascent entrepreneur vs. franchise components of differences and similarities
decision. Michael (1996) argued that risk undermines the effective use of human
capital, which is fundamental to motivation and risk. Norton and Moore (2006)
made the case that it is information and not risk aversion that is fundamental to a
venture’s growth. Williams (1999) suggested that the gains from trade that are
available to entrepreneurs are not available to franchisees and, hence, increases
franchisee risk.
Our PSED assessment of motivation and risk used a number of subjectively based
questions that were not analytical (i.e., risk vs. return measures such as Beta) and
were extended to include effort and confidence as other elements of motivation and
risk. Stewart et al. (2003) and Corman et al. (1988) identified entrepreneurial
motivation and risk-taking behavior and a training program established at
Glamorgan Business School focused on building student confidence and motivating
through exposure to entrepreneurial risk.1 The concept of effort was defined globally
as, “if I work hard enough it will be difficult to fail,” in contrast to a more specific
appraisal of effort that would include hours of work, labor intensity, benefits, etc.
Thus, confidence is seen as an element of motivation and risk. A high degree of
confidence shapes and modifies this element.
These three components of our model are considered to be hierarchical, with all at
the same level, but with the elements considered as sub-states of the components. A
flow chart of the model appears as Fig. 1.
1
Anonymous (2001), Preparing the small-firm entrepreneurs of tomorrow, Training Strategies for
Tomorrow. Bradford: Jan/Feb 2001.Vol.15, no. 1; pg. 15–18.
Int Entrep Manag J
Methodology
We used the PSED dataset to because of its comprehensiveness and the ability to
compare it to other studies of nascent entrepreneurs and franchisees such as Knight
(1984) and Stoner and Frey (1982). Although the PSED had also been conducted in
several other countries in Europe, Australia and Latin America, much of that data
remains unconsolidated with the data collected in the United States. Nevertheless,
the PSED study remains the most comprehensive study of nascent entrepreneurs in
existence today.2,3
The PSED initially screened 64,622 respondents and contacted 830 nascent
entrepreneurs and 431 comparison group members. Among their nascent entrepreneurs were 52 franchisees. Once respondents had agreed to be part of the survey,
they were sent mail surveys over a period of three years and were ultimately
contacted to complete a phone survey. The combined surveys generated over 5,000
data items that followed respondents over a period of 3 years. For our study, we have
focused mainly on the results in the first year of the PSED since they are most
complete (For a more in-depth coverage, see Gartner et al. (2004)). We also
compared results from the seminal study by Knight (1984) with the results from the
PSED. This allowed us to contrast Canadian data with the PSED data for the US.
Our research differs in that the use of the results of our findings offers models that
may prove useful in differentiating these nascent individuals.
Until now, the PSED dataset has been used solely to explore the attitudes and
motivation of nascent entrepreneurs. However, we found a great opportunity to also
explore relationships and differences between nascent entrepreneurs and franchisees.4 The data set is quite robust and gathers information in several ways. For
example, over 41 question/response modes address the topic of experience. Since the
data range from categorical responses to continuous numerical data, a variety of
statistical techniques were used. As much of the data we used is categorical, we used
‘Chi-square’ tests, presented in Appendix 1, to examine differences in expected and
observed values. We did not wish to start with assumptions of normality, so the nonparametric Jonckheere–Terpstra comparison test (J–T) was used to compare our
findings to those of Knight (1984).
2
Gartner, W.B., Shaver, K. G., Carter, N.M., Reynolds, P.D., editors (2004) Handbook Of Entrepreneurial
Dynamics The Process of Business Creation, Sage Publications, Inc Thousand Oaks, CA.
3
There are several idiosyncrasies in the data as a result of over-samples included in the initial analysis
used to answer some very specific research questions regarding gender and ethnicity. Any research on the
data which involves examining the ethnicity or gender of respondents must include weightings to readjust
the data set to more accurately reflect the universe of nascent entrepreneurs. See Gartner, et al. (2004).
Since our study does not focus on gender or race there is no need to adjust for the over-sample.
4
There are several problems that are a result of not having direct input into the original questionnaires;
questions were asked with a specific purpose in mind and we are using the data for a different analysis.
While this might present some problems the dataset is quite robust and offers many different question
items to address these issues. However our study is subject to any and all limitations of the PSED data
both known and unknown.
Int Entrep Manag J
Results
When we compared our findings with those of Knight (1984), we found directionally similar results, but PSED showed some significant differences. Table 1 shows
the directional agreement between several of our model variables. In most cases, we
observed similar results in both studies. However, when we did a statistical,
comparative analysis between both studies, several of our comparison variables
differed in the magnitude of their results: skills and abilities, preference for future
firm size, the confidence in the level of effort and expected first-year firm income.
Summaries of PSED variables are shown in Appendix 1.
Both studies found that the entrepreneurial group put more weight on previous
experience. The Knight (1984) study found that 64% of the independent (nascent
entrepreneurs) group vs. 11% of franchisees weighted experience more heavily. We
found that the PSED data showed 67% of nascent entrepreneurs vs. 37% of the
franchisee group agreeing very strongly with the value of previous experience.
Findings with regard to startup team size were also similar to those of Knight (1984):
roughly the same number of sole-owner operated firms for both independent and
franchise groups—35% independent vs. 33% franchisee. The PSED data showed
similar results with nascent entrepreneurs: 47 vs. 52% of franchisees. Both Knight
(1984) and the PSED data concluded that the entrepreneurial groups were more
confident that they could put in the effort required to make the startup successful.
Knight (1984) showed that there was a similar response by Independents and
franchisees with a slight edge to independents (97 vs. 92%) regarding their
willingness to work hard. When the PSED asked whether they were confident that
they could put in the required effort, 49% of nascent entrepreneurs vs. 9.7% of
franchisees completely agreed with this statement. There was some statistically
significant differentiation in the level of confidence between the two groups. Finally,
both Knight (1984) and the PSED data disclose that franchisees were the most
common group to have less than one year of experience in the industry of their new
business. Franchisees, according to Knight (1984), were 72% more likely to have no
experience while PSED data showed that 65% of franchisees had less than one year
Table 1 Comparison of PSED findings with Knight (1984)
Highlighted findings PSED PSED
terminology
Knight
Past experience is very
valuable
Skills and abilities are
important
Startup team size
Confident I can put in
effort
Experience of 1 year or less
Independentsb Previous management experience in same
industry is very important
Independents Management ability is very important
a
Nascent
entrepreneursa
Nascent
entrepreneurs
Similarc
Nascent
entrepreneurs
Franchisees
Similarc
Independents
Franchisee
Label given to independent entrepreneurs by PSED
Label given to independent entrepreneurs by Knight
c
Applies to both entrepreneurs and franchisees
b
Highlighted findings Knight’s
terminology
Startup team size of one
Willingness to work hard is very
important
No previous experience
Int Entrep Manag J
of experience in their current industry. On the entrepreneurial side, only 18% of the
independents and 27% of the nascent entrepreneurs had little experience.
One possible explanation for this contrast is that franchisees depend more heavily
on the institutional expertise of the franchiser. In Table 2, we point out the differences
in the interpretations expressed in Knight (1984) and the current PSED study. In the
1984 study, independent experience by nascent entrepreneurs was a prerequisite to
success while the franchisee needed to have little experience. When we tested the
null hypotheses comparing Knight’s data with the current study, the Jonckheere–
Terpstra (J–T) statistic rejected the null at the 0.001 level of significance.
Past experience Data from the PSED show that 40% of franchisees start a business
with less than one year of experience in an industry. This stands in stark contrast
with entrepreneurs, where fewer than 10% of entrepreneurs will start a business with
less than one year’s experience. In fact, 90% of franchisees will have less than
5 years of industry experience before starting a franchise. Among the nascent
entrepreneurs, only 20% would have started a business with less than 5 years of
industry-specific experience. One possible explanation for this contrast is that
franchisees depend more heavily on the institutional expertise of the franchiser. In
the 1984 study, independent experience by nascent entrepreneurs was a prerequisite
to success while the franchisee needed to have little experience. When we tested the
null hypotheses comparing Knight’s data with the current study, the Jonckheere–
Terpstra (J–T) statistic rejected the null at the 0.001 level of significance.
Skills and abilities Both groups were asked whether their skills and abilities would
help them with their startup. The nascent entrepreneurs strongly agreed that their
skills and abilities would be critical 90% of the time. Franchisees only responded
this way 70% of the time and were more likely to disagree that their skills and
abilities were critical to success of their venture. This may be interpreted a number
of different ways. Considering the position of the nascent entrepreneurs, the
uniqueness of their business model may require some level of expertise prior to the
launch of their business. Franchisees may be relying on the institutional expertise of
the franchisor. The franchisee’s initial upfront investment is not just financing a
Table 2 Summary of findings
Findings summary
Jonckheere–Terpstra test
Std. J–T statistic
Two tailed p-values
Value of tangible assets of owners
Past experience very valuable
Skills and abilities will help
Education
Team size
Preference for future firm size
Confident I can put in effort
Expected first year firm income
−0.420
−3.371
−3.590
0.182
−1.337
−3.001
−1.901
−2.540
0.674
0.001
0.001>
0.856
0.181
0.003
0.057
0.011
The null hypothesis is that there is no statistically significant difference between the results obtained in the
PSED survey and the Knight findings
Int Entrep Manag J
location and equipment, but includes financing know-how. Here again, when we
tested the null hypotheses, no difference was found when comparing Knight’s data
with the current study. The Jonckheere–Terpstra (J–T) statistic rejected the null at the
0.001 level of significance.
Preference for future firm size When we examined the vision of the future for the
enterprises, some interesting differences emerged between nascent entrepreneurs and
franchisees. Franchisees, as a group, envision that their firms will grow to be as large
as possible. Nascent entrepreneurs see themselves in enterprises they will selfmanage, containing growth. Given the nascent entrepreneurs’ objectives for a
management team of between four and eight, these would be relatively small firms.
There is a statistically significant difference between the two groups, with Chisquare significant at p<0.003. Not only do these differences show themselves to be
significant, but very few entrepreneurs see themselves as managing firms that are as
“large as possible.” This is also consistent with the findings of Ucbasaran et al.
(2003), who found that the size of the founding team was significantly negatively
associated with subsequent team-member entry. There is a negative relationship with
increasing the size of entrepreneurial startup from the size of the existing
management team. It would appear that nascent entrepreneurs seek to exercise
personal control over many of the details and decisions of the firms they start up.
While the findings of the current study corroborate Knight’s findings, they disagree
on the magnitude at the p>0.003 level of significance.
Confidence in the level of effort This element was measured by the question “I am
confident that I can put in the effort.” The statement in the questionnaire indicates
that effort is regarded as important to the success of the enterprise. The differences
between nascent entrepreneurs and franchisees are statistically significant at p<
0.001. In new startups, it is common for business owners to assert that by effort
alone they can make the business succeed. It is also consistent with desire for small
firm size, since the franchisee or entrepreneur must be able to work on his or her
own if the firm size is to remain small. In each category of response to the
aforementioned question, franchisees “agree more strongly” than nascent entrepreneurs. However, in the last category, which indicates “total agreement” with the
statement, the entrepreneurial and franchisees groups reverse: franchisees seem to be
in less-than-complete agreement with the statement, while nascent entrepreneurs
report the highest level of agreement with the statement. It stands to reason that those
putting more assets at risk would do so only if they believed they were committed to
the project. Here again, there seem to be differences, since between PSED and
Knight (1984) our J–T results were significantly different at the p>0.057 level.
Expected first-year firm income A key aspect of motivation is confidence of success.
We measured confidence with a question in the PSED instrument related to their
levels of confidence by asking about expected income in the first year. The mean
income expected by nascent entrepreneurs (more than $358k) was compared to that
of franchisees (more than $386k). These means were not significantly different.
While the mean expected incomes were relatively similar, their spread was quite
different. The dispersion of expected incomes for franchisees was much smaller than
Int Entrep Manag J
that of nascent entrepreneurs. An “F” test indicated that the differences in the
dispersion of the two groups were statistically significant at p<0.001. This could
mean that entrepreneurs have more uncertainty about the timing and size of early
year income but very high expectations. Franchisees may consider that the
investment will pay off quickly, but that the average payout will be lower and more
consistent than those expected by nascent entrepreneurs.
Logistic model
The differences between the two studies raise some interesting issues. Some may be
attributed to the passage of time since Knight’s (1984) original study, and others may be
explained by the difference in countries (US or Canada). A more fundamental question
arises, however: what are the significant differences between franchisees and
entrepreneurs? For further analysis, we used a logistic model that would examine
differences based on the dimensions we raised in our earlier model. Table 3 displays the
results of a logistic comparison made between franchisees and nascent entrepreneurs.
In this analysis, a stepwise, binary logistic regression was run for franchisees and
then another logistic regression was run for nascent entrepreneurs. Since we had
earlier established the relevance of these variables as part of our initial model, which
was also consistent with Knight (1984), the rationale for using these variables is
strong. In Table 3 the logistic beta coefficients associated with each variable are
displayed above their significance levels, which are, in turn, displayed above the
exponentiated beta, a proxy for the odds ratio. What is most interesting is the lack of
overlap between the two groups, and, in the one variable where there is overlap, the
maximum size of the business has directionally different betas. Ultimately, two
logistic models can be derived from these results:
For nascent entrepreneurs (E) the logistic model takes the form:
Lnð E Þ ¼ a þ b1 X1 b3 X3 þ b4 X4
ð1Þ
Where the odds of the respondent being a nascent entrepreneur may be evaluated
through:
E ¼ eaþb1X 1þb3X 3þb4X 4
ð2Þ
For franchisees (F) the logistic model takes the form:
Lnð F Þ ¼ a þ b1 X1 þ b2 X2 þ b5 X5
ð3Þ
Where the odds of the respondent being a franchisee may be evaluated through:
F ¼ eaþb1X 1þb2X 2þb5X 5
ð4Þ
In the case of the nascent entrepreneur, our results in Table 3 show that nascent
entrepreneurs are 1.39 times more likely to believe in their skills and abilities (p>
0.056) and are confident (p>0.044) regarding their success. This is consistent with
earlier empirical findings. It seems they are also 2.31 times more likely to want to
grow their businesses into much larger businesses (p>0.009). This is consistent with
Int Entrep Manag J
Table 3 Logistic results for nascent entrepreneurs and franchisee
Logistic regression results of attitudinal differences
Franchisee
Maximum size of the business (Q322) b1
B coefficient
Sig
Exp(B)
B coefficient
Sig
Exp(B)
B coefficient
Sig
Exp(B)
B coefficient
Sig
Exp(B)
B coefficient
Sig
Exp(B)
B coefficient
Sig
Exp(B)
Dollar amount of expected Income (Q317) b2
If I work hard, I can successfully start a business
(Q1KA) b3
Overall my skills and abilities will help me start a
business (Q1KD) b4
My past experience will be very valuable in starting
a business (Q1KE) b5
Constant a
Nascent
entrepreneur
−1.364
(0.002)
0.256
0.000a
(0.145)
1.00
–
–
–
–
–
–
−0.622
(0.001)
5.37
2.578
(0.013)
13.169
0.848
(0.009)
2.335
–
–
–
0.286
(0.044)
1.331
0.322
(0.056)
1.394
–
–
–
−2.228
(0.033)
0.108
a
The beta (b2) coefficient for the dollar amount of expected income for franchisees was not significantly
different from zero. Hence, the term would be dropped from Eqs. 3 and 4
the limits-to-growth that may be part of the contractual obligation of a franchisee
versus the unlimited growth potential of an entrepreneurial venture. The franchisees
were, by contrast, much more pragmatic. There were two significant variables: one
was related to the size of the firm (p>0.002). The other was related to past
experience; however, the negative coefficient for experience suggests that franchisees place much less value on previous experience: the franchisee group placed 5.37
times less significance on the value of previous experience (p>0.001). These
variables are a result of the known income potential associated with a franchise.
Interestingly, experience seems to be significant for the franchisees, but it agrees
directionally with the empirical evidence that franchisees have less experience in the
industry they are entering.
Discussion and conclusion
The purpose of this paper was to use the PSED dataset for deriving a better
understanding of the nature of entrepreneurs and, more specifically, to explore the
nature of the differences between nascent entrepreneurs and franchisees. The three
dimensions of our exploration showed differences. There are a number of
conclusions we can draw:
1.
2.
3.
4.
Franchisees have less industry experience, one year compared to 4 years;
Franchisees are less confident that their skills are critical to success;
Education is comparable, although franchisees education seemed skewed higher;
Franchisees do not seem to value their previous experience as much as nascent
entrepreneurs.
Int Entrep Manag J
5. Reputation capital (via experience) is less important to franchisees;
6. No significant difference in team size at startup, but nascent entrepreneurs
show twice the propensity to have a team size of 3–5 members;
7. Franchisees have a vision of a larger future organization;
8. Franchisees had fewer net assets and are less well capitalized.
9. Franchisees expect first year income to be less variable than do nascent
entrepreneurs;
10. Franchisees are less confident that they can make the business a success.
The first five conclusions highlight the difference in value that franchisees place
on experience when compared to nascent entrepreneurs. The PSED showed
franchisees were often less experienced and slightly less skilled in the industry in
which they were planning to operate. As we mentioned earlier, the differences may
result from the expected institutional knowledge which the franchisor will provide to
the franchisee. Franchisees on average had slightly more education. This may be
consistent with the more structured institutional arrangement associated with a
franchise. In other words, if we use higher education as a proxy, franchisees might
be more comfortable working within pre-established complex frameworks than their
nascent entrepreneurial counterparts. The fifth point, regarding reputation capital, is
consistent with the franchisees’ lack of experience. Since the franchisee has begun a
business with little experience there is little reputation capital at stake. Conversely,
the nascent entrepreneur is often creating the framework as he or she develops a
business model. Entrepreneurial reputation and experience are critical as they raise
money to fund their operations. So, it is consistent that the nascent entrepreneur will
have more confidence and put more emphasis on experience and reputation.
When we consider the sixth point, team size, there is no significant difference
between nascent entrepreneurs and franchisees. The results suggest on average that
team sizes for that startup or franchise will be small. However, if we look at the
results more closely we see that nascent entrepreneurs are more likely to have a
larger startup team than franchisees. As we had mentioned earlier, franchisees may
not be as likely to depend on the expertise of their startup team; instead, they are
more likely to depend on the expertise of the franchisor. Nascent entrepreneurs are
more likely to depend on the skills and expertise of their startup teams. However, as
we see in the seventh point, the envisioned size of the organization after it has been
developed is often much larger in the eyes of franchisees than it is in the eyes of
nascent entrepreneurs. It is quite conceivable that the franchisee already knows the
typical size of a model organization after it is up and running. Many franchises have
standardized employee rosters in order to make the organizations more successful. In
other words, the franchisor—as part of the franchise agreement—may already
establish how many employees would be ideal, how many shifts each employee
should work and how many days the franchise should operate. Since nascent
entrepreneurs are considering the organization in its early stages, they may not be
able to accurately predict the business’ ultimate configuration. One can imagine that
if Bill Gates had been asked in 1980 how large he expected Microsoft would
eventually grow, even he would have grossly underestimated the size and impact his
organization would eventually have on his industry.
Int Entrep Manag J
Another interesting finding is that franchisees in the PSED data had fewer net
assets than nascent entrepreneurs. In point eight we state our findings that
franchisees have fewer net assets during the developmental phase of their startups
than do their nascent entrepreneurial counterparts. This makes sense, as a franchise
often has predefined franchise fees and moderately well defined startup costs. The
main uncertainties for a franchise startup are the location-dependent real-estate costs.
This is also supported in point nine as the franchisees have a better notion of their
expected annual income. We conclude that franchisees have chosen a less
ambiguous course than their nascent entrepreneurial counterparts.
For nascent entrepreneurs, the list of uncertainties with regard to costs is
considerably longer. Entrepreneurial startups often have uncertainty at many levels
from operating expenses, to personnel, to unexpected overheads, to product delays,
etc. This might explain why nascent entrepreneurs may have more net assets prior to
the startup: the entrepreneur may need to be better prepared for unexpected
contingencies. Perhaps entrepreneurial startups require a certain level of financial
security before an individual will consider it, or perhaps the entrepreneur is
comfortable with a high level of risk. It is also possible that the nascent entrepreneur
is already counting the valuation of his or her portion of the entrepreneurial startup.
Entrepreneurs may have also prepared for a longer period with little or no income. We
have drawn this inference from the higher degree of uncertainty in first-year income
expressed by nascent entrepreneurs.
Finally, we consider the level of confidence of the franchisee and nascent
entrepreneur and find the franchisee to be less confident. The level of confidence
expressed by both groups was very high. However, some franchisees were more
likely to be uncertain of success, while most were somewhat confident. Nascent
entrepreneurs were more likely to be extremely confident and virtually none
expressed reservations with regard to their future performance. This is consistent
with the first five points: franchisees begin their startups with less experience in the
industry, expertise, and confidence in the value of that expertise. This lack of
experience may temper their outlook on the future success of their startups. The
nascent entrepreneur’s confidence in his or her own ability is consistent with the
self-reliance that is reflected in the ten points outlined above.
Many of these ten points are also presented in Table 2 and Appendix 1, where
they are compared with Knight’s (1984) study. Our study’s results agree with
Knight’s with respect to directionality, but differ in terms of magnitude. Our study
shows that the franchisees have less experience, fewer skills and abilities, greater
desire for larger operations, more confidence, and higher expected income as
compared to independent/nascent entrepreneurs. Knight’s sample, methodology,
conceptualization, country of origin and year of analysis are different from ours.
Despite these differences, our study confirms many of the characteristics of
franchisees identified by Knight.
More research is needed to further examine these variables to be able to better
profile nascent/independent entrepreneurs and franchisees. Such efforts will help
policy makers interested in developing their franchising sector, franchisors in need of
identifying qualified franchisees, and entrepreneurs wishing to know if franchising is
right for them.
Int Entrep Manag J
Acknowledgements The authors would like to thank Kelly Shavers, John Clarkin, Paul Taylor and the
PSED Research Consortium the anonymous referees and C. Mcinnis-Bowers. All errors and omissions are
the responsibility of the authors.
Appendix 1
Summary of results of critical variables
Table 4
Table 4 Summary of results of critical variables
Number of years of previous experience
<=1
1<Y<=2
2<Y<=3
3<Y<=4
Y>4
ChiChisquare square
(Sig)
Nascent
0.151
0.05
0.035
0.047
0.717
Entrepreneurs
Franchisees
0.517
0.103
0.069
0.069
0.241
34.5
Current team size
1
2
3+
Nascent
0.48
0.38
0.14
entrepreneurs
Franchisees
0.54
0.44
0.02
0.052
Confident that I can put in the effort
Completely Generally
Neutral
Generally
Completely
disagree
disagree
agree
agree
Nascent
0.003
0.022
0.068
0.416
0.492
entrepreneurs
Franchisees
0.032
0.129
0.194
0.548
0.097
32.462
Goals for future size of business
As Large as Size to
possible
manage
by self
Nascent
21.10%
78.90%
entrepreneurs
Franchisees
39.20%
60.80%
9.005
My industry experience was important in starting this business
Yes
N/A
Nascent
56.30%
43.70%
entrepreneurs
Franchisees
21.10%
78.90%
17.606
Value of tangible assets
Expected income in first year
Dollars ($)
Nascent
Franchisees Dollars
Nascent
Franchisees
entrepreneurs
($)
entrepreneurs
<0
0.40%
0.00%
0
1.50%
0.00%
500
1.90%
4.30%
1,000
4.60%
0.00%
1,000
2.10%
4.30%
5,000
6.60%
13.60%
5,000
5.70%
10.90%
10,000
11.20%
6.80%
10,000
10.60%
10.90%
50,000
47.90%
47.70%
50,000
41.10%
54.30%
100,000
16.30%
22.70%
100,000 17.10%
6.50%
500,000
10.90%
9.10%
500,000 16.50%
8.70%
0.001
0.974
0.001
0.003
0.001
Int Entrep Manag J
Table 4 (continued)
Number of years of previous experience
1,000,000
>1,000,000
Mean
SD
N
2.10%
0.50%
81,115.39
1,383,678
608
F-value
Sig
0.00%
0.00%
47,818.18
196,305.1
44
49.68
0.001
1,000,000
5,000,000
Mean
SD
N
1.50%
1.50%
358,354.3
2,209,565
581
F-value
Sig
0.00%
0.00%
38,682.59
1,231,356
46
3.231
0.001
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