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Survival of Newly Founded Businesses: A Log-Logistic Model Approach

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  • Talat Mahmood
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    Abstract

    Based on a longitudinal data base we test the "liability of adolescence" hypothesis which states that new firm hazard rates follow an inverted U-shaped pattern. That is, the hazard rate is low for the initial period; the end of adolescence is marked by a hazard maximum, from which then rate declines monotonically. We use a log-logistic model which shows that the "liability of adolescence" argument describes the hazard rates of new establishments for all two and three-digit industries fairly well. Further, the rate shows that the desegregation of industries matters, and considerable differences are found within and across two and three-digit low-, moderate- and high-tech industries. In assessing the effect of market environment conditions on risk we find that risk tends to be elevated in a relatively large number of two-digit low- and high-tech industries in the presence of scale economies, but it is substantially reduced in moderate-tech industries. By contrast, the hazard rate tends to be reduced for quite a large number of three-digit low-, moderate- and high-tech industries in comparison with the two-digit industries, indicating a longer adolescence. The influence of start-up size in reducing the hazard rate is apparently similar between two and three digit low-, moderate- and high-tech industries. The impact of market growth on the risk of failure is not much different for both two and three-digit low-, moderate- and high-tech industries. That is, market growth tends not to reduce the risk exposure. R&D intensity exerts influence interchangeably on the risk of failure confronting new establishments within the two and three-digit low-, moderate- and high-tech industries. ZUSAMMENFASSUNG - (Überleben von Neugründungen: Ein log-logistisches Modell) Basierend auf Längsschnittdaten testen wir die Hypothese der "Liability of Adolescene". Diese besagt, daß die Risikorate einem umgekehrten U-förmigen Verlauf folgt. Das bedeutet, daß die Risikorate in der Anfangsphase niedrig ist; das Ende der "Adolescence" durch ein Maximum der Risikorate bestimmt wird, welche danach monoton abfällt. Das log-logistische Modell stellt die Ergebnisse für alle zwei- und dreistelligen Industrien am besten dar. Ferner zeigen die Ergebnisse, daß das Niveau der Aggregation eine große Rolle spielt und bemerkenswerte Unterschiede zwischen und innerhalb zweistelliger und dreistelliger low-, moderate- und high-tech Industrien zu finden sind. Bei der Einschätzung des Effekts von Charakteristiken der Marktumgebung auf das Risiko finden wir, daß das Risiko dazu tendiert, in einer relativ großen Anzahl von zweistelligen low- und high-tech Industrien erhöht zu werden, wenn Skalenerträge vorliegen, sich jedoch substantiell in moderate-tech Industrien verringert. Im Gegensatz dazu tendiert die Hazard Rate zu einer Verringerung für eine recht große Zahl von dreistelligen low-, moderate- und higt-tech Industrien im Vergleich mit zweistelligen Industrien, was auf eine längere "Adolescence" hindeutet. Der Einfluß der Anfangsgröße auf die Verringerung der Hazard Rate ist offensichtlich ähnlich in zwei- und dreistelligen low-, moderate- und high-tech Industrien. Der Einfluß des Marktwachstums auf das Risiko ist nicht zu unterschiedlich für zwei- und dreistellige Industrien. Das bedeutet, arktwachstum tendiert nicht zu einer Verringerung des Risikos. Die FuE-Intensität übt einen Einfluß auf das Risiko sowohl in zwei- und dreistelligen low-, moderate- und hightech Industrien durch Neugründungen aus.

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    Bibliographic Info

    Paper provided by Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG) in its series CIG Working Papers with number FS IV 97-32.

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    Length: 28 pages
    Date of creation: Dec 1997
    Date of revision:
    Publication status: Published in the Small Business Economics , Vol. 14(3), 2000, pp. 223-237.
    Handle: RePEc:wzb:wzebiv:fsiv97-32

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    Keywords: airlines; market structure and pricing; econometric and statistical methods; special topics;

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    1. Leonard W. Weiss, 1964. "The Survival Technique and the Extent of Suboptimal Capacity," Journal of Political Economy, University of Chicago Press, vol. 72, pages 246.
    2. Baldwin,John R. & Gorecki,Paul With contributions by-Name:Caves,Richard E., 1998. "The Dynamics of Industrial Competition," Cambridge Books, Cambridge University Press, number 9780521633574.
    3. Audretsch, David B & Mahmood, Talat, 1995. "New Firm Survival: New Results Using a Hazard Function," The Review of Economics and Statistics, MIT Press, vol. 77(1), pages 97-103, February.
    4. Guimaraes, Paulo & Mata, José & Portugal, Pedro, 1995. "The Survival of New Plants: Start-up Conditions and Post-entry Evolution," CEPR Discussion Papers 1203, C.E.P.R. Discussion Papers.
    5. Jaffe, Adam B, 1989. "Real Effects of Academic Research," American Economic Review, American Economic Association, vol. 79(5), pages 957-70, December.
    6. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
    7. Bronwyn H. Hall, 1986. "The Relationship Between Firm Size and Firm Growth in the U.S. Manufacturing Sector," NBER Working Papers 1965, National Bureau of Economic Research, Inc.
    8. Doms, Mark & Dunne, Timothy & Roberts, Mark J., 1995. "The role of technology use in the survival and growth of manufacturing plants," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 523-542, December.
    9. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-38, June.
    10. Mata, Jose & Portugal, Pedro, 1994. "Life Duration of New Firms," Journal of Industrial Economics, Wiley Blackwell, vol. 42(3), pages 227-45, September.
    11. Audretsch, David B, 1991. "New-Firm Survival and the Technological Regime," The Review of Economics and Statistics, MIT Press, vol. 73(3), pages 441-50, August.
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