Advertisement

Small Business Economics

, Volume 46, Issue 1, pp 57–78 | Cite as

Does new entry drive out incumbents? The varying roles of establishment size across sectors

  • Keiko ItoEmail author
  • Masatoshi Kato
Article

Abstract

Using establishment-level data for Japan, we examine the effects of new entry on the probability that incumbents will exit from the market. In particular, we estimate how the effects vary depending on the size of both entrants and incumbents and whether the effects of new entry differ across sectors. We find that while new entry increases the probability that incumbents will exit, the effect depends on the size of both entrants and incumbents. We also find that the effect differs significantly across sectors: It is largest in nontradable services, but fairly limited in the case of manufacturing and tradable services. Furthermore, in the case of the tradable services sector, very large-scale entries are less likely to drive out incumbents than medium- or small-scale entries. On the other hand, new entry is most likely to affect incumbents in the nontradable services sector, probably because it is difficult for incumbents in this sector to expand their customer base outside the region. Although small establishments are the most likely to be driven out by new entries in all sectors, very large incumbents are not always the most competitive and, in the case of the tradable services sector, medium-sized establishments are the least likely to be affected by new entry.

Keywords

New entry Entrant Incumbent Survival Exit Japan 

JEL Classifications

L10 M10 L26 

Notes

Acknowledgments

This research is conducted as part of the “East Asian Firm-Level Productivity Project” at the Research Institute of Economy, Trade and Industry (RIETI). The authors would like to thank Hiroyuki Odagiri, Yuji Honjo, Shoko Haneda, participants of workshops at Chuo University and RIETI, two anonymous referees and the editor Alexander Kritikos for their detailed and helpful comments. The authors are also grateful to Yuji Matsuoka for helping us to compile the dataset. This research was supported by grants from the Japan Society for the Promotion of Science (KAKENHI 23243050 and 26780161).

Supplementary material

11187_2015_9675_MOESM1_ESM.xlsx (213 kb)
Supplementary material 1 (XLSX 212 kb)

References

  1. Aghion, P., Blundell, R., Griffith, R., Howitt, P., & Prantl, S. (2009). The effects of entry on incumbent innovation and productivity. Review of Economics and Statistics, 91, 20–32.CrossRefGoogle Scholar
  2. Audretsch, D. B. (1991). New-firm survival and the technological regime. Review of Economics and Statistics, 68, 520–526.Google Scholar
  3. Audretsch, D. B., & Mahmood, T. (1991). The hazard rate of new establishments: A first report. Economics Letters, 36, 409–412.CrossRefGoogle Scholar
  4. Audretsch, D. B., & Mahmood, T. (1995). New firm survival: New results using a hazard function. Review of Economics and Statistics, 64, 97–103.CrossRefGoogle Scholar
  5. Besanko, D., Dranove, D., Shanley, M., & Schaefer, S. (2010). Economics of strategy (5th ed.). Wiley: New York.Google Scholar
  6. Bosma, N., Stam, E., & Schutjens, V. (2011). Creative destruction and regional productivity growth: Evidence from the Dutch manufacturing and services industries. Small Business Economics, 36, 401–418.CrossRefGoogle Scholar
  7. Dunne, T., Roberts, M. J., & Samuelson, L. (1988). Patterns of firm entry and exit in U.S. manufacturing industries. RAND Journal of Economics, 19, 495–515.CrossRefGoogle Scholar
  8. Ellison, G., & Glaeser, E. L. (1997). Geographic concentration of U.S. manufacturing industries: A dartboard approach. Journal of Political Economy, 105, 889–927.CrossRefGoogle Scholar
  9. Fritsch, M., & Schroeter, A. (2011). Why does the effect of new business formation differ across regions? Small Business Economics, 36, 383–400.CrossRefGoogle Scholar
  10. Gelman, J. R., & Salop, S. C. (1983). Judo economics: Capacity limitation and coupon competition. Bell Journal of Economics, 14, 315–325.CrossRefGoogle Scholar
  11. Geroski, P. A. (1995). What do we know about entry? International Journal of Industrial Organization, 13, 421–440.CrossRefGoogle Scholar
  12. Geroski, P. A., Mata, J., & Portugal, P. (2010). Founding conditions and the survival of new firms. Strategic Management Journal, 31, 510–529.Google Scholar
  13. Honjo, Y. (2000). Business failure of new firms: An empirical analysis using a multiplicative hazards model. International Journal of Industrial Organization, 18, 557–574.CrossRefGoogle Scholar
  14. Igami, M. (2011). Does big drive out small? Entry, exit, and differentiation in the supermarket industry. Review of Industrial Organization, 30, 1–21.CrossRefGoogle Scholar
  15. Jensen, J. B., & Kletzer, L. G. (2005). Tradable services: Understanding the scope and impact of services outsourcing. Working Paper Series, WP 05-9, September, Institute for International Economics.Google Scholar
  16. Koster, S., van Stel, A., & Folkeringa, M. (2012). Start-ups as drivers of market mobility: An analysis at the region-sector level for the Netherlands. Small Business Economics, 39, 575–585.CrossRefGoogle Scholar
  17. Mata, J., Portugal, P., & Guimarães, P. (1995). The survival of new plants: Start-up conditions and post-entry evolution. International Journal of Industrial Organization, 13, 459–481.CrossRefGoogle Scholar
  18. Sakakibara, M., & Porter, M. E. (2001). Competing at home to win abroad: Evidence from Japanese industry. Review of Economics and Statistics, 83(2), 310–322.CrossRefGoogle Scholar
  19. Siegfried, J. J., & Evans, L. B. (1994). Empirical studies of entry and exit: A survey of the evidence. Review of Industrial Organization, 9, 121–155.CrossRefGoogle Scholar
  20. Thomas, L. A. (1999). Incumbent firms’ response to entry: Price, advertising, and new product introduction. International Journal of Industrial Organization, 17, 527–555.CrossRefGoogle Scholar
  21. Yoffe, D. B., & Kwak, M. (2001). Judo strategy: Turning your competitors’ strength to your advantage. Boston, MA: Harvard Business School Press.Google Scholar

Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  1. 1.School of EconomicsSenshu UniversityKawasaki, KanagawaJapan
  2. 2.School of EconomicsKwansei Gakuin UniversityNishinomiya, HyogoJapan

Personalised recommendations