Whether meant to improve public policy, private lending, or personal choices by individuals, identifying successful entrepreneurs is essential to allow for optimal allocation of resources in the market economy. In general terms, successful entrepreneurs typically have high human capital. One group of entrepreneurs who has been identified as lacking in human capital relative to other entrepreneurs is franchisees. A franchise network uses local entrepreneurs as local owners and operators of units of an established brand name and production system. Research has shown that these franchisees typically possess lower human capital than entrepreneurs generally. What is the result of investing in these individuals?
In this research we take a novel look at the question of investing in franchisee-entrepreneurs. We examine a unique data set of loans by the US federal government to small businesses across the United States. The specific outcome we examine is whether the entrepreneur, franchisee or independent, defaults on that loan. Comparing all recipients of these loans, we seek to understand whether there is a difference in failure rate between franchisees and non-franchisees, controlling for other relevant lending, economic, and social factors. We find that franchisees have higher default rates and present higher risks then non-franchisees. We also find that franchisor screening and selection have no effect on franchisee failures.
