Resource scarcity theory of entrepreneurship

What is the resource scarcity theory of entrepreneurship?

New ventures need to grow at a fast pace to keep up with incumbent firms. Oxenfeld and Kelly (1969) propose resource scarcity theory to explain which some new ventures choose franchising instead of chaining as a means of growth. A core assumption of the theory is that new ventures are founded below minimum efficient scale, such that there is a negative relationship between growth rate and failure of new ventures (Audretsch, 1995).

Franchising is  a quick way to expand a new venture with little upfront capital because the franchisees provide their own capital for their franchises. Since new ventures are often not able to access mainstream financial markets (e.g., for loans, bonds, and equity), franchising is an important alternative. Startups may also be less able to retain earnings to expand, given their commitments to initial investors who may want a quick return (Combs and Ketchen, 1999). Shane (1996) argues that new ventures may also lack the local knowledge needed for expansion or may find it difficult to acquire the managerial talent (human resources) needed for chaining. With franchising, much of the risk of expansion is pushed to the franchisees.

Once a franchiser grows to a certain size though, then it may gain access to new levels of financial capital and may seek to re-buy existing franchises (especially more profitable ones) or continue expansion via chaining. Alternatively, they may seek to increase their returns from each franchise. One problem with early franchising is that the franchising entrepreneurs may not be able to train franchisees adequately and may not able to monitor them effectively, creating the potential for lower quality growth (Stanworth and Curran, 1999).

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Oxenfeld, A.R. and Kelly, A.O. (1969). Will successful franchise systems become wholly-owned chains? Journal of Retailing, 44, 69–83.

Audretsch, D. B. (1995). Innovation, growth and survival. International journal of industrial organization, 13(4), 441-457.

Combs, J. G., and Ketchen, D. J. (1999). Can capital scarcity help agency theory explain franchising? Revisiting the capital scarcity hypothesis. Academy of Management Journal, 42(2), 196-207.

Stanworth, J., and Curran, J. (1999). Colas, burgers, shakes, and shirkers: Towards a sociological model of franchising in the market economy. Journal of Business Venturing, 14(4), 323-344.

Shane, S. A. (1996). Hybrid organizational arrangements and their implications for firm growth and survival: A study of new franchisors. Academy of management journal, 39(1), 216-234.

Check out the founder on Netflix! The film is about franchising.