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Interdependencies in the Dynamics of Firm Entry and Exit

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  • Kristina Nyström

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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. Copyright Springer Science + Business Media, LLC 2007

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File URL: http://hdl.handle.net/10.1007/s10842-006-0027-x
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Bibliographic Info

Article provided by Springer in its journal Journal of Industry, Competition and Trade.

Volume (Year): 7 (2007)
Issue (Month): 2 (June)
Pages: 113-130

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Handle: RePEc:kap:jincot:v:7:y:2007:i:2:p:113-130

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Web page: http://springerlink.metapress.com/link.asp?id=105724

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Keywords: entry; exit; dynamic panel data; L1; C33;

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  1. Catherine Armington & Zoltan Acs, 2002. "The Determinants of Regional Variation in New Firm Formation," Regional Studies, Taylor & Francis Journals, vol. 36(1), pages 33-45.
  2. Michael Fritsch & Pamela Mueller, 2004. "The Effects of New Business Formation on Regional Development over Time," Papers on Entrepreneurship, Growth and Public Policy 2004-36, Max Planck Institute of Economics, Entrepreneurship, Growth and Public Policy Group.
  3. Michael Fritsch & Pamela Mueller, 2004. "Effects of New Business Formation on Regional Development over Time," Regional Studies, Taylor & Francis Journals, vol. 38(8), pages 961-975.
  4. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1988. "Estimating Vector Autoregressions with Panel Data," Econometrica, Econometric Society, vol. 56(6), pages 1371-95, November.
  5. Geroski, P. A., 1995. "What do we know about entry?," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 421-440, December.
  6. Marcus Dejardin, 2004. "Sectoral and cross-sectoral effects of retailing firm demographies," The Annals of Regional Science, Springer, vol. 38(2), pages 311-334, 06.
  7. Johnson, Peter & Parker, Simon, 1994. " The Interrelationships between Births and Deaths," Small Business Economics, Springer, vol. 6(4), pages 283-90, August.
  8. Kangasharju, Aki & Moisio, Antti, 1998. " Births-Deaths Nexus of Firms: Estimating VAR with Panel Data," Small Business Economics, Springer, vol. 11(4), pages 303-13, December.
  9. Dunne, T. & Roberts, M.J., 1989. "Variation In Producer Turnover Across U.S. Manufacturing Industries," Papers 12-89-2, Pennsylvania State - Department of Economics.
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