The unexpected detrimental effect of organizational size on survival rates among restaurants under public health crisis

In December 2019, numerous cases of pneumonia of unknown etiology were reported in Wuhan, China. A novel coronavirus was identified, which was subsequently named 2019nCoV. Given its medical particularity, in January 2020, the World Health Organization declared a public health emergency of international concern. Along with its associated morbidity and mortality cases, this pandemic reshaped and hampered existing business models. In particular, restaurants, as most of them operate close to the margin, being sensitive to fluctuations in demand. With the imposition of quarantine procedures and social restrictions, which moderated the congregation of individuals in public places, consumers began to be sedentary and desisted visiting restaurants, which lead to a significant rise of transactions and deliveries online. These adjustments constrained competition and survival to restaurants with the resources, structure, and technology to reconfigure their services. Population ecology theory conceives organizational survival as the result of environmental and inertial pressures, which discriminatorily select those entities that are adaptive enough for retention. Organization ecologists have long argued that organizational mortality rates tend to decline with increased size. Since large size intensifies inertial propensities and selection pressures benefit structurally inert organizations, extensive companies are expected to be less susceptible to the risk of failure. As the principal mechanism of elimination or failure is habitually an environmental condition, the main predictor of organizational survival derives from the combined effect of organizational constitution and environmental variation, contingent upon the inertial pressure exerted by internal and peripheral unities. If a population of organizations with specific properties increases or decreases its net reproduction rate, following a modification in the environment and assuming it has been selected for survival or failure by adaptation processes, why small restaurants without the required technological infrastructure and previous digital experience are still flourishing? Based on the principles of the population ecology of organizations, founded on the selection approach to evolution, we examine the boundary conditions of organizational size as a predictor of firms’ survival under a public health crisis. Since the difference-in-differences method captures the significant variances across treatment and control groups, and considering that COVID-19 has affected almost every organization worldwide, the unbiased selection of a control group may be impracticable. Thus, we propose the operation of a dynamic analysis of longitudinal data, through a time series model. Additionally, this probabilistic model allows for the relaxation of the temporal equilibrium assumption. As previous studies have indicated, establishments may die or may be sold. To increase the robustness of this study, we propose analyzing transitions among three economic states: alive, dead, and sold. Given that, (1) larger organizations require more resources to transfer knowledge, information, and capabilities throughout their functional areas, (2) tend to exhibit higher levels of inertia, (3) their communication channels are typically formal and centralized, and (4) need more assets to adopt new technologies, which entails the dissemination of new knowledge within larger strategic business units, we posit organizational size may harm firms when facing a public health crisis.