An evolutionary analysis of franchise firms

Abstract

This study uses an evolutionary perspective to examine the relationship between profit and growth. The evolutionary perspective argues that firm growth refers to the diffusion of fitter routines of the firm. In order to apply this evolutionary view, we investigate franchise data by using various regression techniques such as pooled OLS, fixed/random effects, dynamic GMM, and split-sample regressions. Overall, the empirical results support the positive relationship. Some more findings are: (i) the positive relationship is pronounced for the traditional measure rather than the “evolutionary” measure; (ii) the dynamic GMM regressions show that the positive effect of profit on growth is found only when using the evolutionary measure, which implies that the idea of evolutionary analysis fits well with the dynamic model. Also, the positive relationship is pronounced in small and young groups when using the evolutionary measure.