The Dynamics of the Profitability and Growth of Restaurants; The Case of Norway

Citation: Opstad, Leiv, Johannes Idsø and Robin Valenta. 2022. The
Dynamics of the Profitability and Growth of Restaurants; The Case of
Norway. Economies 10: 53. https://doi.org/10.3390/economies10020053

Abstract: The restaurant industry is quite similar across borders. It is a labour-intensive industry
that is important for tourism and employment. It consists mainly of many small businesses that are
regionally dispersed. There are many studies that have analysed this sector. However, rather few
articles have focused on the dynamics of growth and profit. The purpose of this paper is to apply the
theory of profit persistence and the law of proportionate effect (LPE) to Norwegian restaurants by
using publicly available public panel data from 2010 to 2019. The sample includes 866 restaurants.
One important finding is that Gibrat’s law (LPE) does not seem to hold, meaning the growth is not
independent of the size of the firms. Small businesses grow faster than the others, and they are also
more profitable. There is some degree of profit persistence in the restaurant industry. Profitability is
negatively linked to debt ratios but positively related to working capital. The study shows there is a
trade-off between size and profit. These findings are useful for the industry and for others (public
planning, lenders, and more).
Keywords: restaurant industry; GMM estimator; panel data; profit persistence; Gibrat’s law; law of
proportionate effect (LPE); Norway