Which Resources to Accumulate? Firm Dynamics in a Changing Industry

Abstract

During the long-run evolution of an industry there are often periods with substantial changes to entry and exit rates. Several factors lead to these turbulent firm dynamics. for instance technological development, that affect the resources available to firms. I develop a model in which firms have two resources to potentially accumulate so as to consider the effect on firm dynamics of technological shocks that: change the speed at which firms may accumulate the resources; and alter the substitutability/complementarity across resources. I focus on the transition from an initial equilibrium to a new, eventual long-run equilibrium. The firm dynamics are strongly affected by the interplay of resource substitutability/complementarity, slow-moving resource stocks, and firm forward-looking decisions. Increases in the speed of a accumulation for a resource leads to spikes in entry, and periods of zero entry, such as while incumbents gradually change or exit. Increases in substitutability lead firms in the long run to focus on one resource to accumulate, though near-term response varies across incumbents: smaller firms switch to focus on one resource, whereas larger firms continue to focus on both resources. Thus the transition equilibrium firm dynamics are neither a smooth change from the initial to final stationary states, nor a sudden change at a point in time.