DOES FREE-RIDING OCCUR IN LOCAL INDONESIAN FRANCHISED FB [629309]

DOES FREE-RIDING OCCUR IN LOCAL INDONESIAN FRANCHISED F&B
BRANDS FRANCHISE RELATIONSHIP ?

Abstract

This study aims to analyze the relationship in the franchise business local IndonesianF&B
brands . Samples are taken of 500 respondents; in 5 major cities of the local F&B
brandsfranchisebusiness in Indonesia .This study is using convenience sampling. SEM
(Structural Equations Model) analysis technique in this research was used by making use of
existing software AMOS (Analysis of Moment struct ure) version 18.00. The findings suggest
that centralization has no significant effect on free riding behavior .The study states that the
behavior of free rid ing can not be discounted by formalization, however, the result also
demonstrate interaction may prevent free riding behavior.The result indicates that competition
(external competition) can also reduce the possibility of free riding behavior in local Indonesia
F&B Franchise.

Keywords : Franchise, Free riding, F&B franchise, Indonesia

1. INTRODUCTION

A country is said to be successful in economy if most of the population has a quality of
entrepreneur. Countries that want to advance the economy, at least require 2% of its population
to become an entrepreneur. Only a society with a formidable entrepren eur level will arise a
strong economy as well. Entrepreneurs, in start-up stage , at first encountered many obstacles,
due to not obtaining financial support or management. In this reform era, Indonesia began to
face the global challenges in business, inter alia by authorizing the Antimonopoly Law, so
anyone can plunge into the business world . In business , it is not easy to achieve success, many
challenges to be faced. Many fall in the early stages of a business establishment, therefore
many entrepreneur beg inners are hesitant to start business (Helmers, C., and M Rogers., 2010)
In such a situation, emerge the concept of business cooperation can reduce the risk of
doing business, one of the business concept is franchise. According to (Mendelsohn,
1999) franchise is the grant of a license by a (franchisor) to another party (franchisee), the
license entitles the franchisee to try using the trademark / trade name of the franchisor, and use
the whol e package, which consists of all the elements needed to make people who previously
have not been trained to run it with the help of continuous on the grounds that had been
predetermined.

Franchising affords significant benefits, but also bring considerabl e cost and risk
compared to other methods of distribution (Briggs and Morgan, P.A, 2008) . The advantage of a
franchisee's perspective is the ability to overcome the lack of basic knowledge and specially , the
franchisee gets an extra incentive help continuously from franchisor , operating under the brand
that has been established, require smaller capital than independent business, advertising and
promotional activities benefit from the franchisor, the risk business is reduced, ben efit from the
use of patents, trademarks, copyrights, trade secrets, processes, formulas, access to sources of
loan easier. Also Franchising has several distinctive disadvantages. Weaknesses from the
perspective of a franchisee is suppression control, the fee to the franchisor, franchisor quality
difficulties, restrictions, too dependent, policy mistakes of the franchisor.
In Indonesia, as stated by Lukman Hakim (2008) Business franchise grew rapidly before
the crisis, but at times of crisis in 1998 these bu sinesses tend to stagnate. The franchise
returned to growth in 2000s, it was marked by the proliferation of franchise businesses both
foreign and local. In the last 10 years, in Indonesia has many local emerging franchise
business. Chairman of the Indonesi an Franchise and Lisesi, Karamoy (2009) reported an
average growth of the local franchise business in Indonesia reach the number of 8-9% each
year. In the long run th ese local franchise business prospects remain bright, because the y have
many advantages system that are not owned by the conventional business. Franchising has
proven as a successful business, as it has been achieved by many Indonesian local F&B
franchise that has been successfully developing its business, as J.Co Donuts and Coffee, Ayam
Baka r Wong Solo, Es Teler 77, Bumbu Desa, and Kebab Turki Baba Rafi. In Indonesia, there
are approximately 698 franchises by the number of outlets as many as 23. 844 units consisting
of 63% of local franchises and 37% of foreign franchises (I ntra magazine, 2015 ). In the context
of the broad economy using a franchise establishment can promote the growth and
development of medium and small entrepreneurs who could further enhance economic growth.
Franchise business in Indonesia are mostly engaged in the industry fo od and beverage
(F&B). Based on a survey conducted by Majalah Info Franchise( Info Franchise Magazine ) in
cooperation with Dinamic ( Ide Bisnis , 2011), total value of the Indonesian Franchise business in
2010 amounted to Rp 114, 56 trill ion, Rp 42.6 trillion held by F& B busi ness. This amount is very
large, because the number is more than half the total value of the franchise business in 2008
which amounted to Rp 81.14 trillion. Pietra Sarosa in Ide Bisnis (2011) states that F& B
franchise is still a trend, bec ause the culinary business is considered by the principal and
partner, easy operation and a broad market. Its capital is not too big, but if it is successful, the
turnover obtained can be more than 2 -fold. However, from 1,500 franchisees and business
oppor tunity, it was revealed 60% of the local franchise went bankrupt or failed to apply the
concept of franchise (Muhar ram, 2003). Most of the failures are local F&B franchise brand.
There are several causes ; first, the franchisor has his intention to sell their products only.
Franchise b usiness management is sometime s overlooked, the second cause is the lack of

experience. Many franchise, which recently established new and has one branch already sell
the business to be franchise , thus failing in the m arket.
Another problem that can lead to business failure is an antagonistic relationship often
occurs between the franchisor and franchisee. The franchisor has the right to monitor and
evaluate the behavior of franchisees as written in the contract. On the other side franchisee
wants to have the freedom to manage their businesses because they feel they own capital. In
this condition, a lot of literature mentions the possibility franchisee to practice free riding
behavior .Free riding can be defined as a prac tice that causes losses to franchisees that do not
actually want to cut the cost or quality of the goods sold (Carney and Gedajlovic, 1991). Free
riding practice is very detrimental to the trademark and this is a serious problem for franchisees
(Lafontaine and Shaw , 2012 ; Kidwell et. al.,2007 ).
According to Kid well et al. (2007 ) factors that lead to free riding in the franchisor –
franchisee relationship are centralization, f ormalization, interaction, and external competition.
Cent ralization refers to the extent to which the authority to take decisions concentrated. The
greater centralization focused on the franchisor management (centralized management), the
easier it conflict between the franchisor -franchisee can be controlled and limit free riding. On the
other side , formalization is defined as the rules and procedures specified in the franchisor –
franchisee relationship, to minimize expectations and misunderstandings (Kidwell et al., 2007).
In the franchisor -franchisee relationship , communication concepts and interactions of both
parties are expected to exist in activities, resources, and information. While e xternal competition
here can be addressed for both interbrand and intrabrand competition. This kind of competition
is believed would make franchisee increase effort to avoid negative consequences (free riding).
A free riding franchise can cause problems for the franchisor be cause the customer will
add the brand to the quality of the goods / service for the whole chain (Brickley and Dark, 1987).
This condition raises, because individual franchisees generate one -time sales, but the entire
system on the franchise chain loses cus tomers. If done freely up a lot done, then the entire
chain system because of this action damage the image and reputation of the brand. (Brickley
and Dark 1987; Michael 2000) . If a franchisee withhold effort and successfully free rides on the
franchisor’s b rand name, this may reflect poorly on perceived brand quality and lead to poor
organizational pe rformance (Kidwell et. al., 2007 ).The ability to control free riding behavior is
crucial for productivity and survival of business ( Rokkan & Buvik, 2003). Mainly during las t
decade there are large number of empirical studies about this issue (Kidwell et. al., 2005;
Rokkan & Buvik, 2003; Michael, S.C., 2000; Lafontaine & Shaw; 2012) . This study addresses
the problem of free riding behavior as franchisee -franchisor relationship in F & B local franchise
in Indonesia. The phenomen on of free riding by finding the factors that can affect this behavior

2. LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT

2.1 Franchising in Indonesia

At first, the term franchise unknown in Indonesian legal literature. This is
understandable because the franchise since the beginning are not in the business culture or
tradition of Indonesian society. However, due to the influence of globalization that sw ept in
various fields, the franchise then into the cultural order and the legal order of Indonesian
society. The term franchise went on to become a familiar term with the community, especially
the Indonesian business community and drew attention to the dep ths. Then the term franchise
replaced with the term "franchise" was first introduced by Lembaga Pendidikan dan
Pengembangan Manajemen (LPPM). Franchising is derived from the word "wara", which mean s
more or privileged and "laba" means profit. Thus, warala ba (franchise ) means businesses that
provide advantages over / special (Johannes and Lindawaty, 2007).
According to Article 1 Paragraph (1) PP 42 Year 2007 on Franchise declared Franchise
is special right owned by an individual or business entity to a busi ness system with distinctive
feature in or der to market their goods and/ or services that have proved suc cessful and can be
utilized and/ or used by other parties under the franchise agreement. According to Article 1
Paragraph (1) of the Regulation of the Mi nister of Trade No. 31 / M -DAG / PER / 8/2008 on the
Implementation of Franchises (hereinafter referred to as Regulation 31 of 2008) states that, the
franchise that special rights owned by an individual or business entity to the system business
with distin ctive feature in order to market their goods and/ or services that have proven
successful and can be used and / or used by other parties under the franchise agreement.
Indonesian Franchise Association itself gives a different meaning of the franchise, is th e
franchise is a system of distribution of goods or services to the end customer, where the brand
owner (franchisor) gives rights to individuals or companies to conduct business under the brand
name, systems, procedures and ways that are predefined within a certain period covers a
certain area (Ardian, 2008).

2.2 Free riding
According to Caves and Murphy (1976) free riding is defined as the circumstance in
which at the same price, franchisee reduces the quality of the goods / services, this condition is
usually intended to increase personal profit. Nevertheless it is clear that the free riding practice
will disap point customers. Free riding practices are done if ftranchisee because they do not
think to c reate customer loyalty in business (Gillis and Castrogiovanni, 2012).
According to Dant and Gundlach (1999) free riding is an event (inherent / inevitable)
when a franchisee trying to be more autonomous in its business and the franchisor when trying
to apply the standards to their business operations. In this study, we refer free riding as a
situation where the franchisee enjoys the benefit of membership in the fra nchisor (collaborative
venture), without bearing the full costs and constrains related to it (Rokkan and Buvik, 2003).

2.3 Theoretical Perspective a nd Hypotheses

In formulating hypotheses, we replicate the research that has be en done by Kidwell et, al.
(2007 ) where in the study composed of three kinds of elements of the motivation model to
increase commitment and limit free -riding by considering the structural variables (centralization,
formalization, interaction) as considering the variables that conside r franchisor -franchise
relations (external competition). The study only focuse on the factors that can encourage Local
F&B franchisees carry out free riding behavior. Relationships proposed in this study are shown
in figure 1.

2.3.1 Centralization

Centralization is the hierarchy that are applicable to decision -making. If decisions are at
the top level and centered it is centralized (Ferrel & Skinner, 1988) . In franchising activities,
centralization creates a non -participatory environment which will reduce communication,
commitment, and task involvement among participants (Chen & Huang, 2007). Franchisee
usually invests not with the purpose to be regulated by the central rules. If it is overcontrolled,
the franchisee becomes lack of trust, this situat ion may trigger undesirable action, and the
possibility of free -riding is increasing (Kidwell et. al., 2007 ).

H1. The level of centrali zation in a franchise relationship is positively related to free riding
behavior

2.3.2 Formalization

Formalization measures the extent to which organization uses rules and procedures to
decribe behavior (Liao et al., 2011) . Formalization indicates the extent to which theright s, duties,
and obligations of members of the organization are described and the extent to which these
matters are written down in rules, procedures and intructions (Schminke et al., 2000).
Formalization formulated in this study is the degree to which the franchisees are provided with
rules and procedures that may encourage or even hunder creativity , autonomus work and
learning. In franchisee -franchisor relationship with high degree of formalization, there are explic it
rules that tend to impede the spontaneity and flexibility required for business innovation (Nahma
et. al., 2003; Chen & Huang, 2007) . Formalization are inversely relared to free riding behavior .
Formalization makes franchisees avoid free riding behavior s in running the business due to the
formal relationship and rules, each party know the rights and obligations of each.

H2.The level of formalization in franchise relationship is negatively related to free riding
behavior.

2.3.3 Interaction

In relation to the relatio nship between franchisor and franchisee, the con cept of
interaction is described as a flow of activities, resources, and in formation from franchisor to the
franchisees and the communication that occurs between the two (Vand de Ven, 1976).
Interaction between the franchisor and franchisee is a n important activity for the relations
between the two sides. Franchisee who interact regularly with franchisor can increase level of
monitoring by franchisor . Such condition s are expected to minimize the possibility of free riding
behavior (Kidwell et. al., 2007 ).Good intera ction will be inversely proportional to free riding.
Intensive interaction between the two sides will minimize bias in business information and
minimize the possibility of free riding behavior.

H3.The level of interaction between franchisor and franchisee is negatively related to free riding.
While the high external competition makes franchisee more str icly maintaining quality
standards or in other words could minimize the occurr ence of free riding behavior (Kidwell et. al.,
2007 ). These conditions happen because the franchisees are well aware of the existence of
another competitor in a business that must be war y of their motions in order not to endanger the
business .

H4.The degree of ex ternal competition faced by franchisee is negativel y related to free riding.

Based on the hypothesis formulation and review of the literature on top then developed a
research model depicted in the chart below:

Figure 1. Conceptual Framework

3. RESEARCH METHODS
This research is a explanat iveresearch as it aims to examine the characteristics of
variables and relationships between variables that already exist. The study also aimed to Free Riding (Y) Centralization (X1)
Formalization (X2)
Interaction (X3)
External competition
(X3)

explain the cause and effect relationships. From the investigation, this study analyzes the
causality causal relationship between variables.
3.1 Population and Sampling Techniques
The study pop ulation was limited to the scope of the local F&B brandsfranchisebusiness
in Indonesia who are in 5 major cities: Jakarta, Bandung, Yogyakarta, Surabaya, and Malang. 5
The city chosen by consideration of the number of local franchise businesses in the five cities
and also considered to represent the phenomenon of the franchise in Indonesia. The data used
in this study are primary data. Primary data obtained from interviews regarding the respondents.
The method used for data collection is by interview on selected respondents using a
questionnaire tools (questionnaires). This research was conducted by using convenience
sampling technique, where the research subject was chosen because it is convenient
accessibility and clo se to the researcher. Samples are taken of 500 respondents; each of the
100 respondents for each city.
The relationship betweenfranchisee and franchisor ’s managers dealers used to develop
theoritical construcs and measurements in this study. In this study c ollected information from
both sides, the questionnaire that was adapted to the respective role (whether the franchisor or
franchisee) was given to both parties. Sample in this researc h is just the franchise local F& B
which is considered to have a structur ed franch ise system. The list of local F& B franchises that
have been presented in the following table.

Table 1 . Local F&B Franchise List
J.Co Donuts and Coffe Bebek Slamet
Papa Ron’s Pizza RotiBoy
Ayam Bakar Wong Solo Andrew Crepes
Es Teler 77 Ayam Goreng Fatmawati
Bumbu Desa Sederhana Restoran Masakan Padang
Kebab Turki Baba Rafi Solaria
Quick Chicken Sop Duren Lodaya
Bakso Kota Cak Man Coffe Toffe

Furthermore, we hold the sample selection. Of 16 local F&Bfranchisebrands , we conducted the
questionnaire addressed to the franchisor to franchisor represent. From the franchisor who has
answered our questions, franchisor asked to show some franchisee which in their supervision,
each franchisor show the specific franchisees from one to seven. From the franchisor's
information we conduct interviews for the franchisee. The amount of data we receive is
differentfrom every city. From Jakarta we received 72 of which 9 questionnaires from the
franchisor and 63 questionnaires from the franchisee. Fro m Bandung we received a total of 107
questionnaires, of which 13 questionnaires from 94 of the franchisor and the franchisee. From
Yogyakarta we received 94 questionnaires with details 9 questionnaire from the franchisor and

85 questionnaires from the fran chisee. While from Surabaya we received 83 questionnaires in
which 11 of 72 from the franchisor and the franchisee. From Malang we received 144
questionnaires with details of 15 of the 129 questionnaires from the franchisor and the
franchisee. In total we received 57 questionnaires from the franchisor and 443 questionnaires
from the franchisee.

3.2 Measures
Research questions in the q uestionnaire is to find information related in franchisee -franchisor
relationship in free riding issue by using variables : centrali zation, for malization, interaction,
external competition and free riding . Every variables meansured by five point likert scale. All
items in this study were adopted from Kidwell et. al. ( 2007 ). Centralization items asked the
extent to which conditions the franchisor influence franchisee’s decisions of factors such as
opening hours at the station, station design, purchasing terms, loan warrant, and employees’
salaries. Formalization measured procedures or rules of solving probl ems that have been
formulated in the agreements , such as how to run sales, and how to design the station’s shops.
Interaction items reflected the frequency of communication, interaction and cooperation
between two sides in business activities such as conta ct levels, marketing planning, business
objectives formulation, advertising, finance, macroeconomic analysis, accounting, and human
resource management. External competition item asked the extent to which the explanation
level of competition for their market share , regardless of brand. Free riding items captured the
degree of the urgency of controlling such as the store service, the rules to keep the store clean
(in the least and many customers), the things mentioned above should be discussed further an d
in detail between the franchisee and the franchisor.
4. RESULT DATA ANALYSIS
4.1 Goodness of fit test
The model is said to be good if it meets the criteria of goodness of fit. Goodness of fit
describes the suitability test and statistical tests. In this stu dy initially showed that the results of
goodness of fit does not meet the criteria specified critical value. This means that of all the
criteria used showed poor results as well, which means that the model does not fit the data, so
the model is not fit for use. It is generally very rare to find a model that will fit on the initial
model. Sometimes modification models are needed to better model fitting. AMOS application
provides clues to the model by using a modification index to generate additional models
according to chi -square for each path that may be added to the model. However, modification of
the model shoul d still be based on the particular theory , not just based on the numbers
contained in the modification indices. In this research, modifications done by connecting the
variable inquiring about the formal relationship between franchisor and franchisee with variables
that inquire of good interaction between frachisor and franchisee. O ther than by the number
shown on the modification indices, by linking these variables is assumed that the interaction

between the franchisor and franchisee is a formal interactions, so they can be connected to
each other .

Figure 2. Initial Model

Figure 3. After Modified Model

The evaluation results of this research can be shown in Table 2.

Table 2. Goodness of fit Result
Goodness of
Fit Index Cut off Value Initial Model Model
Evaluation After Modified Model
Evaluation
Chi Square ( χ
2) Expected to be
small 257,195 102.661
Probability ≥ 0.05 0.000 Marginal 0.072 Fit
GFI ≥ 0.90 0.743 Marginal 0.903 Fit
AGFI ≥ 0.90 0.786 Marginal 0.864 Marginal
CMIN/DF ≤ 2.00 2.546 Marginal 1.207 Fit
CFI ≥ 0.95 0.761 Marginal 0.962 Fit
TLI ≥ 0.95 0.856 Marginal 0.971 Fit

RMSEA ≤ 0.08 0.113 Marginal 0.052 Fit
Source :Processed primary data , 2016.

Goodness of fit analysis results showed that after being modified all the constructs that
are used to form a model of research on the process of confirmatory factor analysis has met the
criteria of goodness of fit has been determined. From Table 1 it can b e seen that the initial
model has a chi -square value / CMIN (χ 2) with 101 degrees of freedom. The probability of the
chi-square was significant (P = 0.000), which means that the marginal model. GFI value
obtained for 0 .743. This suggests that the marginal model for the limit on the value of GFI
ranges from 0 (poor fit) to 1 (perfect fit) . AGFI recommended value is ≥ 0. 09. CMIN / DF or the
ratio χ 2 / df initial model was 257.195 / 101 = 2,546. This value is higher than the cut of value,
so that the model c an be said to be around marginal. CFI value on early models of 0 .761
indicating that marginal model. TLI value on the model of 0856, indicated that the marginal
model. RSMEA value on the initial model is 0.113 which shows that the marginal model.
Model aft er modified has a chi -square value / CMIN (χ 2) amounted to 102.661 with 85
degrees of freedom. The probability of the chi -square was significant (P = 0.072), which means
that the model fit. GFI value obtained for 0 .903, which means that the model fit. AGF I value
obtained for 0 .864 indicate the marginal value. The recommended value is ≥ 0.09. CMIN / DF or
the ratio χ 2 / df models after being modified is 102.661 / 85 = 1.207. These values are qualified,
so that the model can be said to be fit. CFI value o n the model of 0 .962 which indicates that the
model fit. TLI value on the model of 0 .971, indicating that the model fit. RMSEA value on the
model is 0 .052 which showed that the model fit. The results of modified model provides a model
that is fit despite A GFI value obtained indicates that the marginal model, but still tolerable. The
modified model results provide overall model fit better than the initial model.

4.2 Hypothesis analysis
The test of structural model was performed using AMOS (Analysis of Moment Structure) version
18.00. centralization, formalization, interaction, external competition

Table 3 . Regression Weight Structural Equation Models
Estimate S.E. C.R. P
Label Description
H1 Centralization (X1)  Free riding (Y) -.352 .215 -1.638 .101 Rejected
H2 Formalization (X2)  Free riding (Y) .243 .164 1.483 .138 Rejected
H3 Interaction (X3)  Free riding (Y) .607 .128 4.740 .000** Accepted
H4 External Competition (X4)  Free riding
(Y) .329 .153 2.149 .032* Accepted
Note: *significant at 0.05; **significant at 0.01 .

The relationship between the variables Centralization (X1) with variable free riding (Y)
shown by CR value of -1.612 and P of 0.107. While the relationship between the variables
Formalization (X2) with variable free riding (Y) shown by CR values of 1.362 and P -value 0.173.
The relationship between the variables Interaction (X3) and Free riding (Y) shown by CR value
of -0.473 and a P value of 0.636. From the values of CR can be said to be ineligible significance
which is exp ected ≥ 1.96 and P -value expected <0.05.. It can be concluded that H1 H2 H3
rejected. The relationship between external variables competition (X4) with variable Free riding
(Y) shown by CR value of 2.149. The value of C R is eligible is ≥1.96, was a P -value of 0.032
which is required to qualify is <0.05. With the fulfillment of these two criteria, the hypothesis
which states under the external positive effect on free competition riding behavior (H4) is
acceptable.

5. DISCUSION

The findings suggest that centralization has no significant effect on free riding behavior .
centralization of franchising networks depends on the distribution of intangible knowledge
assets of the franchisor and the franchisee. Intangible assets called spe cific systems know how
and brand name assets have a stronger influence on the allocation of decision rights in the
franchise chain. Centralized decision -making will be efficient if the decision makers have specific
knowledge of the time and place (Von H ayek , 1935, 1940). March and Si mon (1958) apply a
similar idea to be applied in the design of the organization. Local F & B franchisee in Indonesia
determine to join the franchising business because the franchisor is considered to have a
foundation brand recog nition, in the sense that the franchisor already has a well established
reputation so that customer will trust products sold without seeing the business owner who still
lay.
The franchisor offers business systems can provide guarantees of profit, manageri al
support, and marketing for the franchisee. Additionally franchisor will conduct regular training to
employees and franchisees so that the operational standards of quality products and services in
accordance with the standards of the franchisor. From som e of the points mentioned above, it
can be seen that for the franchisee, franchisor is considered to have a business intangible
knowledge offered to franchisees so that the franchisee did not mind if the franchisor to
centralize. According to Doyle 1990 fra nchisor's intangible assets is defined as a system of
specific know -how and brand assets as capital reput ation. Specific systems know how to
include: knowledge and skills in business location selection, store’s layout arrangement, product
development, and procurement (Kacker, 1988). Brand names are defined as invisible asset
investments in marketing and promotional systems as a result of asymmetric information
between companies and customers (Gonzales Diaz and Lopez, 2002). The higher the intangible
knowledge assets of the franchisor relative to the franchisee, the higher is the franchisor’s
portion of residual decisi on rights, and the more centralized is the franchising network

(Windsperger, 2004). The sample in this research is the local F & B franchise that can be said
renowned in Indonesia, franchises have a stronger centralization system and the franchisee
conside rs that the centralization of the franchisor did not encourage them to perform free
riding behavior .
The nature of formalization in franchising is degree of which the franchisees are
provided with rules and procedures that deprive versus encourage creative, autonomous work
and learning. High formalization imply explicit rules which are likely to impede the spontaneity
and flexibility needed for internal innovation (Chen and Huang, 2007). The study states that the
behavior of free riding can not be discounted by the formalization, however, demonstrated that
the interaction may prevent free riding behavior. The study states that the behavior of free riding
cannot be discounted by the formalization, however, the result demonstrated that the interaction
may preven t free riding behavior. Since the notion of formalization is what needs to be done,
such as written rules and procedures, instruction in packing programs, resource allocation,
number of production worker units, employee turnover and dismissal, and so on. This reflects
that franchisee in Indonesia prefer informal relationships (interaction informally) as compared to
the use of formalization in solving business problems. In a study conducted by Budi Paramita
(1992) on 172 companies in several cities in Indone sia also mentions mostly business
organizations Indonesia is considered to be less to communicate tasks, generally coordinated
through the plan in each adjust or feedback, but not entirely bureaucratic.
Formalization measured by manual employee handbooks , organizational structure,
written mission statement, manual procedures and rules applied all levels of the organization
(Pugh et al., 1986) .Local F & B franchise in Indonesia is not too detailed to formulate things that
become the benchmark formalization. However, that does not mean they do not have a set of
rules in business.Actually, if observed from the actual events in the field in local Indonesia F&B
franchising, commitment is already formalized by a long -term contract , yet the formal interaction
dicta ted by contract and entrepreneurial -franchisees will always have strategic flexibility.
High f ormalization can have a negative effect on job satisfaction (Arches, 1991) and can
lead to free -riding . However cooperative interaction are found to be useful tools to minimize free
riding behavior opportunism. Moreover trust in organizations can have a positive effect on
franchise relationship, which means that trust in franchise interactions reduces the need for
franchisees oversight through formal (written) contracts (Ekelund, 2014).
The result indicates that competition (external competition) can also reduce the
possibility of free riding behavior in local Indonesia F&B Franchise. Market competition may put
direct pressure on fi rms to increase quality (Baggs & Bettignies 2007). The results of this study
support previous research conducted by Kidwell et al (2007) which states that external
competition can reduce the possibility of free riding behavior . In the local F & B franchise in
Indonesia, both franchisor and franchisee are very observant to read the conditions of external
competition. When there are competitors the surrounding environment, they maintain the quality
of their services and products so that they ca n win the competition. In these circumstances, the

possibility franchisee to practice free riding can be said to be small. Of the conditions described,
it is understood that the local F & B franchise business in Indonesia, external competition
practice min imizes the possibility of free riding.

6. IMPLICATION FOR FUTURE RESEARCH

This study did not examine the relationship between franchisor and franchisee since the
franchisee decided to join. The sample in this study w as also limited in the local F& B franchise
in Indonesia. In addition, this study did not measure the effect of free ri ding behavior on the
business financial condition. Future research is expe cted to compare between local F& B and
foreigners F&B franchise in Indonesia from when the franc hisee decided to join the franchisor,
but it needs to be considered also to examine the influence of the behavior of free riding on our
financial condition and perspectives of consumers to the brand.

Acknowledgements
Thanks to Hohai University that provide support for the implementation of this study. Thanks
also to the team of researchers whose names are not biased mention one by one, which with
their help this study can be completed. Not least, we also want to thank some of those who
have helped provide a dvice and input to this paper.

References

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