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

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 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.