Does new entry drive out incumbents? The varying roles of establishment size across sectors
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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.
KeywordsNew entry Entrant Incumbent Survival Exit Japan
JEL ClassificationsL10 M10 L26
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).
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