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Entry and exit by new versus existing firms

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  • Plehn-Dujowich, Jose M.
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    Abstract

    Firms relocating across industries or product lines are empirically relevant in industry dynamics: they account for 22% of exit; and two-thirds of surviving firms alter their product mix every 5 years. Yet, existing theories of industry dynamics focus exclusively on new entrants and assume that firm exit is synonymous with failure. This paper proposes a model that incorporates entry and exit by both new and existing firms into a standard framework of industry dynamics. There are two forms of exit: a firm may shut down by selling its assets to earn their salvage value, or reallocate its assets at a cost to enter another industry or product line. In equilibrium, a low-skill firm shuts down from and a high-skill firm transfers out of an industry with a low state of demand. We show the model is consistent with a series of stylized facts pertaining to the entry and exit patterns of new versus existing firms.

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    Bibliographic Info

    Article provided by Elsevier in its journal International Journal of Industrial Organization.

    Volume (Year): 27 (2009)
    Issue (Month): 2 (March)
    Pages: 214-222

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    Handle: RePEc:eee:indorg:v:27:y:2009:i:2:p:214-222

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    Web page: http://www.elsevier.com/locate/inca/505551

    Related research

    Keywords: Firm survival Entry and exit Industry dynamics;

    References

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    Cited by:
    1. Söderbom, Måns & Weng, Qian, 2012. "Multi-product firms, product mix changes and upgrading: Evidence from China's state-owned forest areas," China Economic Review, Elsevier, vol. 23(4), pages 801-818.
    2. Elsa de Morais Sarmento & Alcina Nunes, 2012. "The Dynamics of Employer Entreprise Creation in Portugal Over the Last Two Decades: A Firm Size, Regional and Sectoral Perspective," Notas Económicas, Faculdade de Economia, Universidade de Coimbra, issue 36, pages 6-22, December.

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