Full References Notes

Geroski (1995) What do we know about entry?

Stylised facts:

1) Entry is common. Large numbers of firms enter most markets in most years, but entry rates are far
higher than market penetration rates. In the UK, for example, an average of between 18 and 96 new
firms entered each of 87 three-digit manufacturing industries per annum over the period 1974 to
1979. The rate of entry is typically also fairly high (it ranged from 2.5% to 14.5% in the UK), but the
rate of entry penetration (gross sales by entrants divided by total industry sales) is usually much more
modest (it ranged from 1.45% to 6.36% in the UK). The difference between entry rates and entry
penetration arises from the fact that entrants are much smaller than incumbents (entrants averaged
33-50% of the average size of firm in the UK).

2) Although there is a very large cross-section variation in entry, differences in entry between
industries do not persist for very long. In fact, most of the total variation in entry across industries
and over time is 'within' industry variation rather than 'between' industry variation. Rates of entry are
rarely high or persistently low over time in particular industries, but, rather, entry seems to come in
bursts that are not highly synchronized across industries.

3) Entry and exit rates are highly positively correlated, and net entry rates and penetration are modest
fractions of gross entry rates and penetration. The common view that entry occurs when super-
normal profits are positive and exit when they are negative suggests that the number of firms in an
industry should vary over time if a substantial amount of entry and exit occurs in response to super
and sub-normal profits. Further, entry and exit rates should be negatively correlated across industries
(particularly over very short time intervals). This view is difficult to reconcile with the fact that a
typical three digit industry in the UK gained an average of 50 new firms per year over the period
1974-1979 and lost an average of 38, experiencing a net entry rate of just over 1% and a negative net
penetration rate of -0.42%.

4) The survival rate of most entrants is low, and even successful entrants may take more than a
decade to achieve a size comparable to the average incumbent. In Canada, the estimated average life
of an entrant was about 13 years, and only 40.2% of the 1971 cohort of entrants were still alive in
1982. If one accepts the proposition that the barriers to entry facing small entrants are generally
rather modest, then these observations suggest the existence of substantial 'barriers to survival' of
some type.

5) De novo entry is more common but less successful than entry by diversification. In the US, for
example, entry rates for de novo entrants varied between 15.4% and 22.5% over five-year censuses
between 1963 and 1982, while entry rates for diversifying firms creating new plants varied between
2.8% and 5.3%.

6) Entry rates vary over time, coming in waves which often peak early in the life of many markets.
Different waves tend to contain different types of entrant. The clearest example of this was reported
by Gort and Klepper (1982), who examined 46 products in the US over most of their life cycle.
Starting from commercial introduction, many of these markets experienced rapid entry (averaging a
net increase of about six new firms per year) over a period of about ten years, a levelling off of net
entry, and then a contraction phase averaging about five exiting firms per year and lasting an average
of about five years.

7) Costs of adjustment seem to penalize large-scale initial entry and very rapid post-entry penetration
rates. This proposition is a relatively recurrent feature of many case studies, and is almost certainly
part of the explanation of the observations summarized in stylized fact 4 above. More direct evidence
on costs of adjustment was uncovered by Biggadike (1976), who examined the experiences of 40
diversifying entrants in the US in the late 1960s and early 1970s. Most of these firms experienced
major losses through their first four (and more) years of life despite reporting positive gross margins,
largely because of high marketing and R&D expenditures (each of which averaged 40-50% of
revenue).


Stylised results:

1) Entry seems to be slow to react to high profits. Virtually all models presume that entry will be
proportional to expected post-entry profits defined net of the costs of entry. A typical (and
particularly simple) example of this kind of model is:

{

}

where E is entry into some industry at some particular period of time,

is expected post-entry
profits, F is the costs of entry (including absolute cost or product differences between entrants and
incumbents), and is an unknown parameter which measures the speed of entry in response to
profitable opportunities.

Most of the estimates of which have been reported in the literature are rather small and imprecisely
measured. Read literally, they suggest that differences in profits between industries would have to be
much larger than we typically observe them to be to account for observed inter-industry differences
in entry. This is a puzzling result which some have claimed to be inconsistent with the theory that
entry depends on expected profits. What may lie behind this result is a rather odd statistical
incongruence between industry profitability and entry. Differences in profitability between industries
are extremely stable and persistent (much the same applies to differences in profitability between
firms), meaning that most of the variation in profitability across industries and over time is 'between'
industry variation. Entry, on the other hand, varies much more over time and differences in entry
rates between industries are unstable and do not persist for very long. This means that entry exhibits
far more 'within' industry variation than profits do. For example, in the UK between 1970 and 1979,
80% of the total variation in average industry price-cost margins across three-digit industries and
over time was 'between' industry variation, while only 24% of the total variation in entry rates over
the period 1974-1979 was 'between' industry variation. That is, profit differences between industries
are relatively stable over time, while differences in entry rates between industries at any one point of
time do not persist for very long.

2) Entry rates are hard to explain using conventional measures of profitability and entry barriers.
Virtually all of the regressions designed to explain variations in entry across industries and over time
have reported very low R2s (even by the standards of inter-industry cross-section regressions),
indicating that only a very modest amount of the variation in entry across industries in a single year
has been accounted for by use of a model like in (1).

3) High rates of entry are often associated with high rates of innovation and increases in efficiency.
The effects of entry may actually be more profound than just correcting displacements from static
equilibria, since entry may also stimulate growth and development in markets. Numerous case
studies have suggested that entry is often used as a vehicle for introducing new innovations
(frequently because incumbents are more interested in protecting existing rents than in seeking out
new profit opportunities), and many show that entry often encourages incumbents to drastically cut
slack from their operations (this is particularly the case in newly deregulated industries). Acs and
Audretsch (1990) and Geroski (1989) have documented positive correlations between entry and
innovation rates, while Baldwin and Gorecki (1991) compared the productivity of new entrants and
existing firms and observed that entry accounted for about 24% of productivity growth of the typical
Canadian industry.

4) Prices are not usually used by incumbents to block entry. Early contributions to this tradition
focused on pre-entry limit pricing designed to block entry, a theme which has re-emerged in the
recent contestability literature. Other contributions have concentrated on studying what is sometimes
referred to as 'dynamic limit pricing', meaning the post-entry regulation of prices to slow entry.
In fact, the evidence suggests that price is not frequently used by incumbents to deter entry, but that
marketing activities are. Of Biggadike's (1976) sample of entrants, 93% noted price cuts of less than
5% attendant upon entry, but 32% did perceive a rise in marketing expenditures post-entry (similar to
the 40% figure found by Cubbin and Domberger (1988)). Of Smiley's (1988) respondents who were
defending new markets, 32% indicated that they used advertising frequently, 31% used R&D and
patent protection frequently, and almost none used excess capacity or learning curve strategies.

5) Both firm size and age are correlated with the survival and growth of entrants. This raises the
interesting question of what it is that determines which entrants survive, and for how long. One view
is that turnover and displacement are a by-product of the process by which firms attempt to transform
their activities in the face of environmental challenges. Since the process of information acquisition
is costly and time consuming, many new entrants are likely to under-invest in information gathering.


Conclusion
Perhaps the most striking thing that we know about entry is that small- scale, de novo entry seems to
be relatively common in most industries, but that small-scale, de novo entrants generally have a
rather short life expectancy. That is, entry appears to be relatively easy, but survival is not. The most
palpable consequence of entry is exit, and industries that exhibit high entry rates often also exhibit a
high degree of churn at the bottom of the size distribution. If most entry attempts are doomed to
failure and if most entrants take five or ten years before they are able to compete on a par with
incumbents, then few incumbents will find that costly attempts to deter entry at or before the time it
occurs are profitable. The puzzle in all of this is that most estimates of barriers to entry suggest that
they are rather high. It is a little difficult to reconcile high entry barriers with high entry rates, not
least because entry barriers are commonly thought of as an obstacle which prevents firms from
entering a market.









































Doms et al. (1995) The role of technology use in the survival and growth of manufacturing plants

This paper documents the relationship between capital intensity, the use of advanced manufacturing
technology, growth rates, and exit probabilities for a sample of U.S. manufacturing plants. The basic
findings of this paper are: increases in the capital intensity of the input mix and increases in the use
of advanced manufacturing technologies (AMTs) are negatively correlated with plant exit and
positively correlated with plant growth. These correlations persist even after control- ling for age,
size, and productivity differences among the plants. Also, even in industries where the number of
producers is relatively constant, there frequently exists substantial entry, exit, and movement of
producers through the size distribution.

This paper will focus on two sources of producer heterogeneity: the first resulting from variation in
the plant-level capital-labor ratios and the second from differences in the types of manufacturing
technologies adopted by the plant. The fact that producers within the same industry differ in their
capital-labor ratios, with large producers generally being more capital intensive, has been noted by
many researchers. These documented variations in input mix can arise from differences in factor
prices, with larger plants having lower capital prices than small producers, or for other reasons.

Recent work by Griliches and Siegel (1991) and Brynjolfson and Hitt (1993) support the conjecture
that productivity and the use of advanced manufacturing technologies are related. Second, the use of
advanced technologies may be a proxy for unobserved managerial ability. If plants with superior
management are best able to fully exploit advanced production technologies, then plants with high-
quality managers will be the most likely to adopt the new production methods as well as be the most
likely to grow and survive because of their efficiency advantages. This would generate a positive
correlation between technology adoption, growth, and survival.

There are also several reasons why we expect the growth and exit rates of plants to vary with the
capital intensity of their input mix. A basic rationale for the inclusion of this variable is that plants
with higher capital-labour ratios may have a lower ratio of variable to fixed costs. Given the basic
shutdown rule that a plant will remain in operation as long as it can cover variable costs, plants with
low variable-cost production techniques may be more likely to withstand negative shocks than high
variable-cost producers. Second, in the presence of sunk entry or exit costs and uncertain future
market conditions, Dixit (1989) demonstrates there is an option value to remaining in a market even
if the producer is incurring losses. If the capital intensity of the plant's technology is related to the
magnitude of sunk costs then turnover rates will vary between more and less capital-intensive
producers.

Conclusion
The basic conclusion is that size, age and productivity are not sufficient statistics for characterizing
the growth and failure patterns, but that capital has an independent role to play. In particular, the
capital intensity of the plant, measured as the capital-labor ratio, is negatively correlated with plant
failure and positively correlated with plant growth. This correlation exists even after controlling for a
range of other plant characteristics. We also find that plants that have adopted a larger number of
advanced manufacturing technologies, such as robots, lasers, or computer-controlled machinery,
have higher subsequent growth rates and lower failure rates.

Boeri and Bellmann (1995) Post-entry behaviour and the cycle: Evidence from Germany

A main finding is that exit is not responsive to the cycle, which is at odds with views of recessions as
times of 'cleansing' where creative destruction processes occur. This result is at odds with views of
recessions as times of 'cleansing' where Schumpeterian creative destruction process occur, involving
the exit of the least efficient units. Rather than being concentrated during cyclical downturns, exit is
large among new entrants at any phase of the cycle. Neither does the expansion or decline of the
industries in which the new plants are operating affect their probability of survival. The single most
important factor affecting hazard rates of new plants is their age, which is consistent with many
theories of the firm based on Bayesian learning processes. Additionally the growth of survivors also
displays little cyclical sensitivity, but tends to become more responsive to aggregate business
fluctuations as the cohort ages. We suggest two interpretations for this rather counter-intuitive result.
The first is the role played by competition within specific market niches in the exit and growth of
new plants. The second explanation is related to technological factors, such as capacity constraints
facing the growth of new plants.





























Mata et al. (1995) The survival of new plants: Start-up conditions and post-entry evolution

This paper examines the longevity of entrants. We find size to be an important determinant of the
chances of survival, this being particularly relevant to de novo entrants as compared with entry by
established firms. Current size is also found to be a better predictor of failure than initial size.
Moreover, our findings indicate that, after controlling for size differences, past growth matters for
survival suggesting a partial adjustment process for firm size in the post entry period. Finally, new
plants are more likely to live longer if they enter growing industries or industries with little entry
activity.

Although numerous, new competitors are in general small. When they start, they typically compete
with other small (and in most cases also new) firms rather than dispute the dominant firm's market.
Second, as a rule, their life is quite brief and, in most cases, entrants exit before they can really
become a threat to market leaders. Audretsch (1991) found that, among a cohort of new firms in US
manufacturing, the probability of plant exit was decreasing with initial size. On the other hand, the
post-entry growth was found to be negatively related to initial size (Dunne et al., 1989; Audretsch
and Mahmood, 1994). There are two major arguments that can be made to explain these results. The
first is that new firms enter typically below the minimum efficient scale in the industry. Therefore,
they are confronted by a cost disadvantage visa vis their efficiently scaled competitors, which makes
their survival more difficult. However, for those that are nevertheless able to survive, the need to
reduce this cost gap provides a strong incentive to grow. This is the main argument in Audretsch
(1995), who found that initial size is positively related to survival, but negatively related to post entry
growth.

We identified new plants created during the 1980s in Portuguese manufacturing and followed their
performance until the end of the decade. We were able to date the deaths of those that did not survive
after 1990. We found that more than 20% of new plants died during their first year, more than 50%
do not survive for 4 years and only 30% of the initial population survive for 7 years. Survivors, on
the other hand, grow. Seven years after having started, the average size of new plants is twice as
large as their start-up size. This general pattern holds, irrespective of the type of entrant, but plants
started by newly created firms are clearly smaller than those created by established firms and grow
faster subsequent to entry.













Disney et al. (2003) Restructuring and productivity growth in UK manufacturing

We analyse productivity growth in UK manufacturing 1980-92 using the newly available ARD panel
of establishments drawn from the Census of Production with around 140,000 manufacturing
establishments per year. We examine the contribution to productivity growth of internal
restructuring (such as new technology and organisational change among survivors) and external
restructuring (exit, entry and market share change). We find that (a) external restructuring accounts
for 50% of establishment labour productivity growth and 8090% of establishment TFP growth; (b)
much of the external restructuring effect comes from multi-establishment firms closing down poorly-
performing plants and opening high-performing new ones, and (c) external competition is an
important determinant of internal restructuring.

Following the objectives set out at the start of the paper, our key findings can be summarised as
follows.
. (a) Between 1980 and 1992, entry, exit and the reallocation of market shares (what we term
external effects) accounted for 50% of labour productivity growth and 8090% of TFP
growth in establishments. The contribution of entry and exit, which accounts for around 50%
of labour productivity and TFP growth over the period, arises because entrants are more
productive than exitors. The difference between the results for labour productivity and TFP
growth is likely to be due to capital-labour substitution among survivors. We examine the
sensitivity of these results to a variety of different assumptions.
. (b) The contribution of internal and external effects varies between single- and multi-
establishment firms. Between 1980 and 1992, single establishment firms (25% of
manufacturing employment) experienced no productivity growth among survivors; all
productivity gains for this group came from entry and exit. Most of TFP growth for multi-
establishment firms was also due to entry and exit of establishments within the multi-
establishment firms, the rest being productivity growth of surviving establishments.
. (c) Market competition significantly raises both the level and growth of productivity. This
result is robust to selectivity correction. Studies that have not corrected for selectivity
overstate the magnitude of the competition effect.
. (d) Comparing the US and the UK, 19827, the impact of net entry was almost exactly the
same, whilst in comparable US studies the within establishment effect was larger. We are
cautious about drawing strong conclusions about the relative contributions in the US and UK
without more detailed work on time periods, data, weighting etc.











Audretsch (1995) Innovation, growth and survival

The purpose of this paper is to explain why the likelihood of survival and post-entry growth rates
vary systematically from industry to industry. In particular, the post-entry performance of new firms
is linked to the underlying technological conditions in an industry. In industries where innovative
activity, and especially the innovative activity of small firms, plays an important role, the likelihood
of new entrants' surviving over a decade is lower than in industries where innovative activity is less
important. At the same time, those entrants that are able to survive exhibit higher growth rates. In
addition, the conditional likelihood of surviving an additional two years for entrants that have
already survived the first few years is actually greater, and not lower, in highly innovative industries.

One of the major findings of Dunne, Roberts and Samuelson (1988, 1989) is that the survival rates
and growth rates of new firms vary systematically across industries. However, they provided no
insight as to why such variation in survival rates should exist. The purpose of this paper it to examine
explicitly why the propensity for firms to survive as well as their growth rates vary systematically
across manufacturing industries. In particular, we focus upon the hypothesis posited by Geroski
(1995, p. 21), that "the growth and survival prospects of new firms will depend on their ability to
learn about their environment, and to link changes in their strategy choices to the changing
configuration of that environment.

To test the hypothesis that what have traditionally been considered to pose as barriers to entry
actually serve as barriers to survival, a logit regression equation is estimated for 11322 new-firm
entrants in U.S. manufacturing in 1976, where the value of one defines a firm that has survived until
1986 and the value of zero defines a firm which has exited prior to 1986.

The evidence from this paper implies that two of the traditional characteristics of structural barriers,
scale economies and product differentiation, do constitute a barrier to survival. However, the impact
of these barriers on the likelihood of survival is apparently not permanent, but rather weakens as the
entrant gains experience in the industry, or at least as the post-entry time period increases.
















Disney et al. (2000) Entry, exit and establishment survival in UK manufacturing

First, calculations on the raw data show a number of interesting features about entry and exit, some
of which have been shown for other countries but not for the UK. We document, for example, that:
(a) entry and exit rates in the UK correlate strongly across time and within industries; (b) in any year
around 3 in 10 establishments have just entered or will exit; (c) that survivors are, on average, four
times as large as establishment that enter and exit; (d) that 65% of entrants will have exited after five
years and (e) that about half of entry and exit employment is due to entry/exit from new
establishments set up by existing enterprise groups.




































Baldwin (1995) The dynamics of industrial competition

Economists have long focused on the process of entry and exit of firms. Many have emphasized its
importance in facilitating the adaptation of industry to change. In the simplest of expositions, the acts
of entry and exit serve to equate above- or below-normal profits with competitive rates. In other
models, potential rather than actual entry serves to limit monopoly power. At one time included
under the rubric of limit-pricing models, this argument has more recently been given theoretical
elegance by contestability theory. The turnover that results from exit and entry is also seen as a
conduit through which new ideas and innovations are introduced.
This view of entry is not shared by all. To some, the lack of entry indicates that entry is unimportant.
Others have portrayed entry as an interesting but irrelevant curiosity. One such view depicts entrants
as fringe firms that swarm into and out of an industry without having much impact. References to the
entry and exit process as "hit-and-run" leave the impression, intentional or otherwise, of an unstable
fringe that makes no contribution to such indicators of progress as productivity. Shepherd (1984), in
a criticism of contestability theory, stresses that entry as an external force is usually secondary to
internal conditions within an industry in determining the strength of competition.