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Impact of Uncertainty and Sunk Costs on Firm Survival and Industry Dynamics

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  • Vivek Ghosal

Abstract

This paper examines the role played by uncertainty and sunk costs on the timeseries fluctuations in industry structure as captured by the number of firms and establishments, and concentration. Using an extensive dataset covering 267 U.S. manufacturing industries over a 30-year period, our estimates show that time periods of greater uncertainty, especially in conjunction with higher sunk costs, results in: (i) decrease in the number of small firms and establishments; (ii) less skewed size distribution of firms and establishments; and (iii) marginal increase in industry output concentration. Large establishments are virtually unaffected. We also control for technological change and our estimates show that technical progress decreases the number of small firms and establishments in an industry. While past studies have emphasized technological change as a key driver of industry dynamics, our results indicate that uncertainty and sunk costs play a crucial role. Our findings could be useful for competition policy, study of firm survival, models of creative destruction, evolution of firm size distribution, and mergers and acquisitions. ZUSAMMENFASSUNG - (Die Bedeutung von Unsicherheit und 'sunk costs' für das Überleben von Unternehmen und die Weiterentwicklung von Industrien) In diesem Diskussionspapier wird die Rolle untersucht, die Unsicherheit und 'sunk costs' auf die Zeitreihenfluktuationen in der Industriestruktur, wie sie durch die Anzahl der Unternehmen abgebildet wird, und in der Unternehmenskonzentration haben. Dafür wird ein umfassender Datensatz verwendet, der 267 Firmen des verarbeitenden Gewerbes in den U.S.A. über einen Zeitraum von 30 Jahren enthält. Unsere Schätzungen zeigen, daß sich Zeiten größerer Ungewißheit auf die Industrie auswirken, vor allem wenn die Unsicherheit mit höheren sunkcosts verbunden ist, indem (i) die Zahl kleinerer Unternehmen abnimmt; (ii) die Verteilung der Unternehmen nach ihrer Größe weniger schief-verteilt ist; und (iii) ein Grenzzuwachs an Outputkonzentration der Industrie zu verzeichnen ist. Große Einrichtungen bleiben dagegen nahezu unberührt. Wir habe unsere Untersuchung darüberhinaus auf technologischen Wandel hin kontrolliert und festgestellt, daß die technische Weiterentwicklung die Zahl der kleinen Unternehmen eines Industriezweigs ebenfalls reduziert. Während frühere Studien gerade den technologischen Wandel als den treibenden Faktor für die dynamische Entwicklung von Industrien herausgestellt haben, weisen unsere Ergebnisse allerdings den Faktoren Unsicherheit und 'sunk-costs' die entscheidende Rolle zu. Diese Ergebnisse können fruchtbar für weitere Studien im Bereich der Wettbewerbspolitik sein, für Studien zum Überleben von Firmen, für Modelle kreativer Zerstörung, der Evolution von Firmengrößenverteilung und nicht zuletzt für Unternehmensaufkäufe und -zusammenschlüsse (M&A).

Suggested Citation

  • Vivek Ghosal, 2003. "Impact of Uncertainty and Sunk Costs on Firm Survival and Industry Dynamics," CIG Working Papers SP II 2003-12, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
  • Handle: RePEc:wzb:wzebiv:spii2003-12
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    Cited by:

    1. Fredrik Wilhelmsson & Konstantin Kozlov, 2007. "Exports and productivity of Russian firms: in search of causality," Economic Change and Restructuring, Springer, vol. 40(4), pages 361-385, December.
    2. Kerstin Pull, 2003. "Der Einfluss personalpolitischer Flexibilität auf die Standortwahl Multinationaler Unternehmen: eine empirische Analyse," IAAEG Discussion Papers until 2011 200301, Institute of Labour Law and Industrial Relations in the European Union (IAAEU).
    3. Vivek Ghosal, 2003. "Endemic Volatility of Firms and Establishments: Are Real Options Effects Important?," CIG Working Papers SP II 2003-13, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    4. D.B. Audretsch & L. Klomp & E. Santarelli & A.R. Thurik, 2004. "Gibrat's Law: Are the Services Different?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 24(3), pages 301-324, May.
    5. Vivek Ghosal, 2003. "Firm and Establishment Volatility: The Role of Sunk Costs, Profit Uncertainty and Technological Change," CESifo Working Paper Series 980, CESifo.
    6. Joseph P. Byrne & Marina-Eliza Spaliara & Serafeim Tsoukas, 2016. "Firm Survival, Uncertainty, And Financial Frictions: Is There A Financial Uncertainty Accelerator?," Economic Inquiry, Western Economic Association International, vol. 54(1), pages 375-390, January.
    7. Mohamed Jellal & François-Charles Wolff, 2005. "Free Entry under Uncertainty," Journal of Economics, Springer, vol. 85(1), pages 39-63, July.
    8. T. Huw Edwards, 2006. "Who Gains from Restructuring the Post-Soviet Transition Economies, and Why?," International Review of Applied Economics, Taylor & Francis Journals, vol. 20(4), pages 425-448.
    9. Fariñas, Jose C. & Ruano, Sonia, 2005. "Firm productivity, heterogeneity, sunk costs and market selection," International Journal of Industrial Organization, Elsevier, vol. 23(7-8), pages 505-534, September.
    10. Ioannis Kessides & Li Tang, 2010. "Sunk Costs, Market Contestability, and the Size Distribution of Firms," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 37(3), pages 215-236, November.
    11. Werner Hölzl, 2003. "Tangible and intangible sunk costs and the entry and exit of firms in Austrian Manufacturing," Working Papers geewp33, Vienna University of Economics and Business Research Group: Growth and Employment in Europe: Sustainability and Competitiveness.
    12. Vesa Kanniainen & Mikko Leppämäki, 2009. "Union power, entrepreneurial risk, and entrepreneurship," Small Business Economics, Springer, vol. 33(3), pages 293-302, October.

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    More about this item

    Keywords

    Industry dynamics; firm survival; firm size distribution; uncertainty; sunk costs; technological change; creative destruction; option value; financing constraints.;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

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