Impact Of Geographic Proximity On Firm Performance

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The impact of geographic proximity on firm performance has been the subject of great interest among scholars. Evidence coming from different disciplines is, however, strictly mixed. Specifically, two views are prevalent in cross-disciplinary literature. One view considers proximity as synonymous with competition. Scholars who support this view argue that firms realize lower gains when located close to one another (Kalnins 2004; Pancras, Sriram, and Kumar 2012). The other view focuses on the positive aspects of proximity, mostly in terms of clustering (Lu and Wedig 2013; Tracey, Heide, and Bell 2014).
Scholars, who consider proximity as competition, focus on the degree of intra-brand competition as a function of the distance between outlets. They argue that outlets located close to one another are more likely to compete for the same set of customers, which results in the sales cannibalization (Kalnins 2004). This sales cannibalization decreases significantly as the distance between outlets increases (Davis 2006; Pancras, Sriram, and Kumar 2012). Specifically, in the franchising context, where franchisors receive the initial franchise fee for every new outlet opened and are paid royalty as a percentage of sales, franchise firms have a strong tendency to open new outlets close to one another as long as the net sales gain from new outlets is greater than the cannibalized sales at existing outlets (Kalnins 2004). This makes franchisee-owned outlets more vulnerable to the
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