Regional Characteristics and the Survival of New Firms

There is an abundant literature on industrial ecology aiming at explaining the survival propensity of recently started firms. The majority of the contributions concentrate on the characteristics of the entrepreneur, the new firm or the industry. Only a small minority of the existing studies consider the influence of the location where the new firm has been started on survival probability. The evidence of the importance of location in the literature is mixed. However, only a limited share of these studies analyzes the importance of localized external economies of scale for the survival of newly founded firms. This relative lack of studies is intriguing since, for example, the ?new economic geography? theory empha-sizes the role that clusters of individual industries and of complementary industries within a distinct geographical area play in terms of proximity and network externalities. Thus, a basic motivation for this paper is that the absolute majority of business survival studies disregard the fundamental facts that every new firm is started in a specific location. A second motivation is the fact that in many of the studies that include spatial factors as explanatory factors the representation of these factors are often not ideal. A third motivation is that the representation of geographical space has not taken into consideration of the importance of the hierarchical structure of geographical space. The purpose of this paper is to test the influence of demand and supply conditions and general economic milieu in localities on the survival of newly founded firms while controlling for firm and industry characteristics and using a proper representation of the hierarchical structure of geographical space.