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 first consider the factors that influence the business owner's decision about being franchised, and then use different empirical approaches to correct for selection bias in our performance analyses. We find that franchised businesses on average benefit from higher survival rates and faster initial growth relative to independent businesses. However, the effects are not large and, conditional on first-year survival, the differences basically disappear. We briefly discuss potential mechanisms to explain these results. U.S. Census Bureau. All results have been reviewed to ensure that no confidential information is disclosed. Support for this research at the Michigan Census Research Data Center is gratefully acknowledged.
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Survival Patterns Among Newcomers to Franchising
January 1997
Working Paper Number:
CES-97-01
This study analyzes survival patterns among franchisee firms and establishments that began operations in 1986 and 1987. Differing methodologies and data bases are utilized to demonstrate that 1) franchises have higher survival rates than independents, and 2) franchises have lower survival rates than independent business formations. Analyses of corporate establishment data generate high franchisee survival rates relative to independents, while analyses of young firm data generate the opposite pattern. In either case, the franchise trait is one of several determinants of survival prospects. The larger-scale, more established firms consistently stay in operation more frequently than smaller-scale, younger firms. Analysis of all corporate establishment restaurant units opened in 1986 or 1987 that use paid employees in 1987 helps to reconcile the seeming inconsistencies reported above. Most of the young franchisee units were not owned by young firms: rather, their parents were multi-establishment franchisees, and most of them were mature firms. Among the true newcomers, franchise survival rates are low; among the entrenched multi-establishment franchisees, survival rates were high.
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Survival Patterns Among Newcomers To Franchising
May 1997
Working Paper Number:
CES-97-05
This study analyzes survival patterns among franchisee firms adn establishments that began operations in 1986 and 1987. Differing methodologies and data bases are utilized to demonstrate that 1) franchises have higher survival rates than independents, and 2) franchises have lower survival rates than independent business formations. Analyses of corporate establishment data generate high franchisee survival rates relative to independents, while analyses of young firm data generate the opposite pattern. In either case, the franchise trait is one of several determinants of survival prospects. The larger-scale, more established firms consistently stay in operation more frequently than smaller-scale, younger firms. Analysis of all corporate establishment restaurant units opened in 1986 or 1987 that use paid employees in 1987 helps to reconcile the seeming inconsistencies reported above. Most of the young franchisee units were not owned by young firms: rather, their parents were multi-establishment franchisees, and most of them were mature firms. Among the true newcomers, franchise survival rates are low; among the entrenched multi-establishment franchisees, survival rates were high.
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Past Experience and Future Success: New Evidence on Owner Characteristics and Firm Performance
September 2010
Working Paper Number:
CES-10-24
Because the ability of entrepreneurs to start their own businesses is key to the success of the U.S. economy and to the economic mobility of many disadvantaged demographic groups, understanding why entrepreneurship activity varies across groups and geography is an increasingly important issue. As a step in this direction we employ a novel set of metrics of business success to the growing literature and find great variation across groups and metrics. For example, we find that black-owned firms grow slower than white or Asian-owned firms. However, once we condition on firm survival, the differences disappear. Interestingly, we also find differences across groups in their start-up histories. For example, Asian-owned firms are less likely than white-owned firms to have started-out as nonemployers but firms owned by all other minority groups, as well as women-owned firms, are more likely to start-out without employees.
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Analysis of Young Neighborhood Firms Serving Urban Minority Clients
May 2008
Working Paper Number:
CES-08-11
This study empirically investigates Michael Porter's hypothesis that urban minority neighborhoods offer attractive opportunities to household-oriented businesses, such as retail firms (1995). Our analysis compares the traits and performance of firms serving predominantly minority clients to those selling their products largely to clients who are nonminority whites. Controlling statistically for applicable firm and owner characteristics, our findings indicate that the minority neighborhood niche does not offer young firms an attractive set of opportunities. Relative to opportunities in the corresponding nonminority household niche and the broader regional marketplace, the neighborhood minority household market is associated with reduced business viability.
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OWNER CHARACTERISTICS AND FIRM PERFORMANCE DURING THE GREAT RECESSION
September 2014
Working Paper Number:
CES-14-36
Minority owned businesses are an increasing important component of the U.S. economy, growing at twice the rate of all U.S. businesses between 2002 and 2007. However, a growing literature indicates that minority-owned businesses may have been especially impacted by the Great Recession. As house prices declined, foreclosures fell disproportionately on urban minority neighborhoods and one of the sources of credit for business owners was severely constrained. Using 2002-2011 data from the Longitudinal Business Database linked to the 2002 Survey of Business Owners, this paper adds to the literature by examining the employment growth and survival of minority and women employer businesses during the last decade, including the Great Recession. At first glance, our preliminary findings suggest that black and women-owned businesses underperform white, male-owned businesses, that Asian-owned businesses outperform other groups, and that Hispanic-owned businesses outperform non-Hispanic ones in regards to employment growth. However, when we look only at continuing firms, black-owned businesses outperform white-owned businesses in terms of employment growth. At the same time, we also find that the recession appears to have impacted black-owned and Hispanic-owned businesses more severely than their counterparts, in terms of employment growth as well as survival. This is also the case for continuing black and Hispanic-owned firms.
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Firms Started As Franchises Have Lower Survival Rates Than Independent Small Business Startups
May 1994
Working Paper Number:
CES-94-03
Aspiring entrepreneurs choosing to become franchisees certainly expect to improve their chances of survival during the turbulent early years of business startup and operation. Alignment with a franchiser parent company offers the franchisee managerial assistance, access to financial capital, and access to markets via the right to utilize the parent company trademark. This study examines survival patterns among franchise and nonfranchise small firms started between 1984 and 1987: survival through late 1991 is tracked for all firms. Although the franchise operations are larger scale, better capitalized young firms, the independent business startups are found to be more profitable and their survival prospects are better than those of franchises.
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Preferential Procurement Programs Do Not Necessarily Help Minority-Owned Business
January 1995
Working Paper Number:
CES-95-01
Some minority business enterprises (MBEs) benefit from their participation in government preferential procurement programs and some do not. A subset of minority vendors identified in this study behaves in ways suggesting sensitivity to penalties for violating minority business certification and procurement program regulations. These firms flourish in the absence of fraud penalties. A different group of minority vendors selling to government benefits from an environment in which MBE certification is comprehensive, bonding and working capital assistance are available, and assistance is delivered by a staff dedicated to aiding potential and actual MBE vendors. The preferential procurement program can serve as either a valuable economic development tool for fostering minority business development, or it can promote MBE front companies that pass on their procurement contracts to nonminority firms. Some governments choose to operate the former type of program; others opt for the latter.
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The Characteristics of Business Owners Database, 1992
May 1999
Working Paper Number:
CES-99-08
This report describes the Characteristics of Business Owners (CBO), 1992 microdata available to researchers at the Center for Economic Studies and the CBO survey. The Bureau of the Census has conducted the 1982, 1987, and 1992 CBOs for the U.S. Small Business Administration, the Minority Business Development Agency, and the general public. For the 1992 CBO, there were three surveys, a sole proprietor survey, an owner survey for each owner in partnerships and S corporations, and a firm survey for each partnership and S corporation. For database purposes, the owner questions on the sole proprietors survey and owner survey were merged, and the firm questions on the sole proprietors survey and firm survey were merged. The owner database has 116,589 records, and the firm survey has 78,147 records. The CBO reports on owners about their background such as owner type (race, and ethnicity), age, education, work experience, veteran status, etc. The CBO reports on firms (with and without employees) about their economic details such as industry, financing, home-based, exporting, franchising, profits, etc. In addition, the CBO was conducted in 1996 on firms in existence in 1992 allowing for some survivability analysis. The CBO over samples women and minority owners to allow researchers to more reliably study these owners. This survey is an extension of the Survey of Minority-Owned Business Enterprises (SMOBE) and Survey of Women-Owned Businesses (WOB) within the economic census. The CBO is available as a report, special tabulations, or microdata for approved researchers.
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Small Businesses Do Appear To Benefit From State/Local Government Economic Development Assistance
February 1995
Working Paper Number:
CES-95-02
This study analyzes traits of small businesses that received state/local government aid in such forms as managerial, technical assistance, help in obtaining loans or bonding, and procurement assistance. Over 13 percent of small firms nationwide were found to be involved in selling goods/services to state/local government. Among firms owned by nonminorities, aid recipients tend to be the larger small businesses, but this pattern did not typify minority-owned firms. Among the nonminority businesses, furthermore, those aided by state/local government are more likely than nonassisted firms to remain in operation, even when various form and owner characteristics are controlled for statistically; this pattern did not typify minority-owned firms. State/local government aid flows disproportionately to women- owned businesses and to firm owners who lack managerial experience. No evidence was found indicating targeting of assistance to specific industry groups.
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Clusters of Entrepreneurship
October 2009
Working Paper Number:
CES-09-36
Employment growth is strongly predicted by smaller average establishment size, both across cities and across industries within cities, but there is little consensus on why this relationship exists. Traditional economic explanations emphasize factors that reduce entry costs or raise entrepreneurial returns, thereby increasing net returns and attracting entrepreneurs. A second class of theories hypothesizes that some places are endowed with a greater supply of entrepreneurship. Evidence on sales per worker does not support the higher returns for entrepreneurship rationale. Our evidence suggests that entrepreneurship is higher when fixed costs are lower and when there are more entrepreneurial people.
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