Factors affecting business mortality: a case study of the restaurant industry on Oahu, Hawaii

Abstract

This study examines and hopes to improve upon the explanation of why businesses exit from an industry. This field has thus for been largely neglected. As shown by the literature in Chapter II, very few theoretical studies have attempted to model the exit process. However, there have been a large number of empirical studies that have contributed to the field. These studies can be divided into three categories: (1) studies that measure the mortality of business firms; (2) studies that explain the observed pattern of business mortality; and (3) studies that attempt to predict future failure of individual firms. The literature on business firm mortality indicated that focusing on a single industry and on variables within a particular type of firm would be most logical and productive since these variables can be age-related. Thus, the restaurant industry was selected as a case study. The analysis of the restaurant industry in Oahu revealed that the probability of exit decreased with a firm's age. The estimated mortality functions were able. to accurately predict the observed exit of firms. None of the macroeconomic explanatory variables contributed to the predictive power of the model. Additionally, there appeared to be no significant correlation between high entry rate to the high exit rate of firms. In summary, the findings of the study suggest that variables related to the age of the firm determine to a large extent the firms survival or failure. The analysis concludes with an interview of both former and current owners/managers of the firms in the case study. The empirical results suggest a unique role of cash reserve in determining the firms survival or failure. Finally, it is concluded that the variables associated with firm's age were much more important in explaining business exits than the variables associated with shifts in the mortality function.