Survival and Growth in Retail and Service Industries: Evidence from Franchised Chains

41 Pages Posted: 2 Dec 2007

See all articles by Renata Kosova

Renata Kosova

Imperial College London

Francine Lafontaine

University of Michigan at Ann Arbor - Stephen M. Ross School of Business; University of Michigan at Ann Arbor - Department of Economics

Date Written: November 2007

Abstract

We examine whether the effects of firm age and size on survival and growth found in studies of manufacturing firms 1- hold also in retailing, 2- are a reflection of underlying firm-specific efficiency, per models such as Jovanovic's (1982), or play a separate role from other firm characteristics and unobserved firm fixed effects, and 3- whether controlling for observed and unobserved firm characteristics is empirically warranted in this literature. We do this using a large unbalanced panel dataset that covers about 1000 franchise chains each year from 1980 to 2001. Our data has the advantage of being comprised of the type of "single-product" entities that models of industry dynamics focus on. We find that age and size affect chain growth and survival even after controlling for chain fixed effects and other characteristics such as contract terms. Moreover, with the exception of the effect of size on survival, the age and size effects we find are consistent with results from studies of manufacturing firms, where authors did not control for fixed effects. However, controlling for chain fixed effects is empirically warranted, and once we do, chain size increases rather than decreases chain exit rates. Our results overall, including also analyses of the effect of age and size for mature chains, provide strong evidence of convergence in size. We argue that this chain-size convergence is more apparent in our context than in manufacturing studies primarily because of the single-product nature of franchised chains.

Keywords: Franchising, firm growth, survival, services

JEL Classification: L11, L21, L81, M21

Suggested Citation

Kosova, Renata and Lafontaine, Francine, Survival and Growth in Retail and Service Industries: Evidence from Franchised Chains (November 2007). Available at SSRN: https://ssrn.com/abstract=1034163 or http://dx.doi.org/10.2139/ssrn.1034163

Renata Kosova (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Francine Lafontaine

University of Michigan at Ann Arbor - Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109-1234
United States
734-647-4915 (Phone)
734-936-0279 (Fax)

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States

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