The Determinants of Firm Survival

Abstract

The paper decomposes the determinants of firm survival into firm and product (industry) attributes. Industry attributes, we hypothesize, encompass primarily exogenous variables that exert their influence both over time and across markets. These consist mainly of the characteristics of demand and of the rate and form of technical change. Variations across firms, we hypothesize, arise mainly from endogenous variables, namely learning by doing, Darwinian survival of the fittest and the obsolescence of initial endowments. It is shown that there exist both industry and firm life cycles. Our hypotheses are tested with new data for all firms active in 33 product markets. The data encompass the time span from the initial introduction of the product to the maturity of the market by 1991. Survival is viewed as a function of a vector of firm variables and a vector of industry variables. And the latter, in turn, are assumed to be largely, but not exclusively, dependent on the phase of the product life cycle that the firm is in at any given point in time. Firm survival is affected by the phase of the industry life-cycle within which the firms operate. The paper further examines the role of endogenous firm variables in explaining the pattern of hazard rates within each phase of the product's life cycle. It is found that the principal variables that affect hazard rates are learning by doing, the dynamics of attrition of inefficient firms and technological intensiveness via its impact on obsolescence of initial endowments. Thus the firm's life cycle depends on the technological intensiveness of its production process.