Does Gibrat’s law apply to chain organizations? The case of franchising

The growth of firms and the distribution of their sizes have been focal points in industrial organization, entrepreneurship, and strategic management studies. A key starting point in these discussions is the Law of Proportionate Effect, also known as Gibrat’s law, formulated by Robert Gibrat. In his model, Gibrat hypothesized that firms grow at a rate independent of their prior size. Although initial empirical results supported the hypothesis, more recent literature generally indicates that smaller firms tend to grow faster than larger ones. While Gibrat’s law has been investigated in the context of manufacturing firms, it has rarely been examined in the services sector and is often overlooked in franchise chains. This study posits that franchise chains offer distinct methods of expansion that alter the dynamics of growth and its relationship to firm size. We empirically test the assertion using a sample of 1300 unique chains over a 40-year period, showing that the growth of franchising differs significantly from that of manufacturing firms. In general, large franchise chains grow faster than smaller ones.