Abstract
This paper investigates the interdependence between firm entry and exit from an industrial dynamics perspective. The paper discusses how entry and exit rates in industrial sectors are affected by previous exit and entry rates. Economic theory presents two different approaches to how entry and exit of firms are interrelated, the multiplier effect and the competition effect. This paper intends to investigate which force is the predominant one, for entry and exit patterns, respectively. The empirical analysis is based on data for 25 Swedish manufacturing industries at the 2-digit SIC level, during the period 1991–2000. In the estimation work the study applies a dynamic panel data approach as suggested by Anderson and Hsiao [Journal of the American Statistical Association, 76:598–606, 1981] and Arellano and Bond [Review of Economic Studies, 58(2):277–297, 1991]. With respect to entry, the empirical results support the multiplier effect such that entry stimulates future entry, but also a competition effect such that past exit induces additional entry. With regard to exit, on the other hand, the competition effect rules, implying that previous entry causes subsequent exit and previous exit reduces subsequent exit.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Anderson, T.W. and Hsiao, C., “Estimation of dynamic models with error components,” Journal of the American Statistical Association, vol. 76, pp. 598–606, 1981.
Arellano, M. and Bond, S., “Some tests of specification of panel data: Monte Carlo evidence and an application to employment equations,” Review of Economic Studies, vol. 58(2), pp. 277–297, 1991.
Armington, C. and Acs, Z., “The determinants of regional variation in new firm formation,” Regional Studies, vol. 36(1), pp. 33–45, 2002.
Baltagi, B.H., Econometric Analysis of Panel Data. Wiley: New York, 2001.
Dejardin, M., “Sectoral and cross-sectoral effects of retailing firm demographics,” Annals of Regional Science, vol. 38(2), pp. 311–334, 2004.
Dunne, T. and Roberts, M.J., “Variation in producer turnover across U.S. manufacturing industries,” in Geroski, P. and Schwalbach, J. (eds.), Entry and Market Contestability: An International Comparison, Blackwell: Oxford, 1991.
Fritsch, M., “New firms and regional employment change,” Small Business Economics, vol. 9(5), pp. 437–448, 1997.
Fritsch, M. and Mueller, P., ”Effects of new business formation on regional development over time,” Regional Studies, vol. 38(8), pp. 961–975, 2004.
Geroski, P.A., Market Dynamics and Entry. Blackwell: Oxford, 1991.
Geroski, P.A., “What do we know about entry?,” International Journal of Industrial Organization, vol. 13(4), pp. 421–440, 1995.
Greene, W.H., Econometric Analysis, 5th edition. Prentice Hall: New Jersey, 2003.
Hirsch, S., Location of Industry and International Competitiveness. Clarendon: Oxford, 1967.
Holtz-Eakin, D., Newey, W. and Rosen, H.S., “Estimating vector autoregressions with panel data,” Econometrica, vol. 56(6), pp. 1371–1395, 1988.
Holtz-Eakin, D., Newey, W. and Rosen, H.S., “The revenues–expenditures nexus: evidence from local government data,” International Economic Review, vol. 30(2), pp. 415–429, 1989.
Hujer, R., Rodrigues, P.J.M., and Zeiss, C., “Serial correlation in dynamic panel data models with weakly exogenous repressors and fixed effects,” Working Paper J.W. Goethe-University, Frankfurt, 2005.
Johnson, P. and Parker, S., “The interrelationships between births and deaths,” Small Business Economics, vol. 6(4), pp. 283–290, 1994.
Kangasharju, A. and Moisio, A., “Births–deaths nexus of firms: estimating VAR with panel data,” Small Business Economics, vol. 11(4), pp. 303–313, 1998.
Marshall, A., Principles of Economics, 8th edition. MacMillan: London, 1920.
Nyström, K., Entry and Exit in Swedish Industrial Sectors, JIBS Dissertation Series no. 32, Jönköping International Business School, Jönköping, 2006.
Reynolds, P.D., Camp, S.M., Bygrave, W.D., Autio, E., and Hay, M., Global Entrepreneurship Monitor. 2001 Summary Report. London Business School: London, 2002.
Schumpeter, J., Capitalism, Socialism and Democracy. Harper & Row: New York, 1942.
Shapiro, D. and Khemani, R.S., “The determinants of exit and entry reconsidered,” International Journal of Industrial Organization, vol. 5, pp. 15–26, 1987.
Siegfried, J.J. and Evans, L.B., “Empirical studies of entry and exit: a survey of the evidence,” Review of Industrial Organization, vol. 9, pp. 121–155, 1994.
Storey, D.J., Understanding the Small Business Sector. Routledge: London, 1994.
Storey, D.J. and Jones, A.M. “New firm formation—a labour market approach to industrial entry,” Scottish Journal of Political Economy, vol. 34(1), pp. 37–51, 1987.
Vernon, R., “International investment and international trade in the product cycle,” The Quarterly Journal of Economics, vol. 80(2), pp. 190–207, 1966.
Author information
Authors and Affiliations
Corresponding author
Appendices
Appendix 1
Appendix 2
The distribution of the entry rate variable.
Appendix 3
The distribution of the exit rate variable.
Rights and permissions
About this article
Cite this article
Nyström, K. Interdependencies in the Dynamics of Firm Entry and Exit. J Ind Compet Trade 7, 113–130 (2007). https://doi.org/10.1007/s10842-006-0027-x
Received:
Revised:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10842-006-0027-x