Brighter prospects? Assessing the franchise advantage using census data

Lafontaine, F, Zapletal, M and Zhang, X (2019) Brighter prospects? Assessing the franchise advantage using census data. Journal of Economics and Management Strategy, 28 (2). pp. 175-197. ISSN 1058-6407

Abstract

This paper uses Census micro data to examine how starting a business as a franchise rather than an independent business affects its survival and growth prospects. We assess factors that influence the decision to become a franchisee and use various empirical approaches to correct for selection bias in our performance analyses. We find that franchised businesses on average exhibit higher survival rates than independent businesses, but importantly, the difference is small compared to claims in the trade press. The effect is also short lived: conditional on surviving a year or two, we no longer find survival (or growth) differences. We then explore two potential sources for this small survival advantage, namely franchisors’ screening process and the benefits arising from the brand and business know-how provided by franchisors. We find evidence that both of the sources contribute to the franchising advantage.