Firm Entry Research Articles

Domestic barriers to entry and external vulnerability in emerging economies

Emerging economies (EMEs) exhibit high regulatory costs of firm creation. At the same time, lower firm-creation costs are associated with greater financial development and use of formal credit, which can expose EME firms to external financial shocks that propagate to EMEs via the banking system such as those that EMEs experienced during the Global Financial Crisis. We present evidence showing that in response to an adverse shock to the US banking system, EMEs with low firm-creation costs exhibit smaller contractions and earlier recoveries in cross-border bank flows, domestic bank credit, and GDP compared to EMEs with high firm-creation costs. A two-country model with banking frictions, cross-border bank flows, and endogenous firm entry can successfully capture this evidence. Our findings suggest that greater domestic credit-market deepening via lower barriers to firm entry in EMEs need not be associated with greater macro and domestic credit-market volatility.

Asset pricing with costly and delayed firm entry

AbstractSurvey evidence tells us that stock prices reflect the risks investors associate with long-run technological change. However, there is a shortage of models that can rationalize long-run risks. Unlike the previous literature assuming a fixed number of products, our model allows for new product varieties that appear in the form of new firms which face entry costs and delay in the entry process. The fixed variety model has a significant limitation in translating macroeconomic volatility into asset return volatility. Our model with growing varieties induces endogenous low-frequency fluctuations in productivity driving large, persistent variations in consumption growth and asset prices. It also changes the valuation of assets through the increase in the volatility of the pricing kernel (with a positive long-run component) and leads to higher excess returns. Our model is motivated by a simple recursively identified VAR model containing quarterly US data 1992Q3-2018Q4 with the following list of variables: total factor productivity, output, a measure of firm entry, and the excess return on stocks.

Endogenous Entry and Growth of Firms with Heterogeneous Firms

We analyze the impact of persistent cost heterogeneity of potential firms on free entry equilibria under a Cournot setting. We show that firm heterogeneity always reduces the number of firms in equilibrium, and that vertical and horizontal market growth have different effects on industry population and firm dynamics. Vertical market growth always promotes entry and growth of new firms, but heterogeneity weakens this effect. For horizontal market growth, we identify two growth regimes: incumbents dominate in large markets with significant heterogeneity, while new entrants grow faster in smaller markets with low heterogeneity. In contrast to existing research, we show that higher degrees of heterogeneity among potential firms reduces entry rates in both cases.

The Impact of Restricting Labor Mobility on Corporate Investment and Entrepreneurship

Abstract This paper examines how labor mobility restrictions like noncompete agreements affect firms’ investment decisions. Using matched employee-employer data from LinkedIn, I show that increases in the enforceability of noncompete agreements lead to widespread declines in employee departures, specifically in knowledge-intensive occupations. Established firms that rely more on these knowledge-intensive occupations increase their investment rate in physical capital. However, new firm entry in corresponding sectors declines. I provide evidence for different mechanisms to explain these patterns. Together, the findings show that labor frictions play an important role in investment decisions. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Empirical issues concerning studies of firm entry

Abstract We discuss that entry can be considered from various levels of analysis: entrepreneur-level, firm-level, and also at higher levels of aggregation, such as the industry-level and country-level. We also formulate a list of six challenges for econometric studies of firm entry, highlighting the data sources, typical empirical setups, potential sources of bias, and appropriate econometric techniques. While progress can be made with sophisticated econometric estimators, a pressing need for entry studies concerns detailed data on the gestation process, entry modes, and the value of resource endowments and knowledge endowments.

Firm creation, entry costs, and house‐price volatility∗

AbstractAmid growing work on the link between firm creation and cyclical housing‐market dynamics, we document a significant, positive, and robust cross‐country relationship between the level of new firm creation and the cyclical volatility of house prices. Using a business‐cycle model with endogenous firm entry, housing, and housing‐finance constraints and shocks, we show that, via general equilibrium effects, greater average firm entry can be a powerful amplification mechanism of housing‐finance shocks. These shocks and constraints play a key role in quantitatively rationalizing the link between firm creation and house‐price volatility across countries.

Efficient computation of discrete games: Estimating the effect of Apple on market structure

Discrete games provide the means to analyze market dynamics with limited data. However, computing such games with many players—especially in a complete information setting—is computationally infeasible because the strategy space increases exponentially with the number of players. This study presents a novel and practical method to compute and estimate discrete games. To do so, the study introduces two methodological innovations. First, we develop an efficient simulator that requires fewer random draws to evaluate the likelihood of discrete games with multiple equilibria. The augmented simulator avoids random draws that are not compatible with the observed equilibrium outcome and, thus, efficiently uses all draws to evaluate the likelihood. Second, we utilize general‐purpose computing on graphics‐processing unit (GPGPU), using multiple processing cores in a graphics‐processing unit, to increase computational speed. The two features allow us to estimate the model significantly faster compared to traditional methods. The study's empirical application examines the effect of Apple's company‐owned stores on the retail market structure. The results show that agglomeration effects exist between Apple and upscale firms. The presence of an Apple store attracts high‐income customers, promoting the entry of upscale firms and the exit of discount firms.

Can public environmental concern inhibit the market entry of polluting firms: Micro evidence from China

When constructing a multigovernance environment system, it is important to systematically study the impact of the public’s environmental concern on the behavior of polluting firms. In relation to the market entry of polluting firms, this paper explores whether public concern for the environment can effectively reduce the likelihood of such firms entering the market to achieve control of pollution emissions at the source. Benchmark analysis shows that an increase in public environmental concern can inhibit the market entry of polluting firms in the region. Heterogeneity analysis shows that public environmental concerns exert a stronger effect on preventing the market entry of nonstate-owned firms and firms in developed regions than on other firm types. Mechanism analysis shows that improving the severity of environmental regulations, encouraging firms to make greater investments in environmental protection, and inducing firms to pursue additional environmental R&D innovation are effective mechanisms by which public environmental concern restrains the market entry of polluting firms in the region. Expansion analysis demonstrates that public concern about the environment can lessen the pollution emission intensity of new firms and promote certain new firms to carry out boundary layout. This research offers a scientific basis and policy reference that can serve to guide the public in actively participating in environmental governance.

Short-term economic dynamism as a policy tool to address supply shortages during crises

Abstract This paper investigates the role of short-term economic dynamism in responding to crisis induced supply shortages. We focus on the domestic manufacturing ramp-up of surgical masks, respirators, and their intermediary products in response to the COVID-19 pandemic. We develop a novel method for timely identification and validation of the evolving state of domestic manufacturing. To unpack the activities of domestic manufacturers and related institutions, we triangulate across 56 qualitative interviews, certifications, Thomasnet.com®, industry associations, and other public data. We find that while large manufacturers could rapidly scale up, onshore, or diversify production to enter into domestic production of critical medical supplies, these large manufacturers alone were insufficient to meet the spike in demand. In face of this shortage, small and medium enterprises (SME), who entered into mask and respirator production as de novo firms, spin-offs, and by diversifying, were important in increasing overall domestic capacity and serving markets unmet by large hospital distributors. These firms often had fewer competencies and resources compared to larger firms, and received less effective government support. Despite these disadvantages, a number of SMEs succeeded in entering into domestic production, and our interviews suggest this capacity could have been better integrated into the national response. We propose new theory for how and when federal and state governments should support short-term economic dynamism (firm entry into target products and/or markets) during crises to address supply shortages, and the types of market and network failures federal or state governments may be most effective at addressing.

The impact of firm-level Covid rescue policies on productivity growth and reallocation

We evaluate the impact of Covid-19 rescue policies on both firm-level and aggregate productivity growth, exit, and creative destruction. Using administrative data on the universe of firms’ support mechanisms in Flanders over 2019–2021, we first estimate the causal impact of this support program on firm-level outcomes. Firms that received support saw a 4%–5% increase in productivity, compared to similar firms that applied for, but did not obtain support. The productivity premium effect is temporary however: by the last quarter of 2021, treated firms are indistinguishable from untreated firms. Support measures also drastically reduced firm failure. The propensity to exit the market was 45% lower for treated firms, and if no support would have been issued, aggregate firm exit would have increased by 9%. We decompose aggregate productivity growth, a share-weighted average of firms’ productivity growth rates, into several components. Within firms over time, both treated and untreated firms contribute positively to aggregate productivity growth. There are signs of insufficient creative destruction on both the extensive margin (firm entry and exit) and intensive margin (reallocation of market shares to more productive firms) during the crisis. However, insufficient reallocation was already present well before the crisis, and there is no evidence that this inefficiency is driven by the contribution of treated firms in particular. Firm-level support measures helped firms to avoid exit, and to temporarily increase productivity, while not altering the ongoing process of creative destruction in the aggregate.

Outside In: challenges for evolutionary studies on entry

Abstract This short note reviews the evolutionary modeling literature focusing on the specific topic of entry of new firms. A large variety of choices have been employed to model entry, often motivated by the need to keep the model simple and comprehensible. Entry is more subject to simplification pressures than other elements of industrial dynamics because a deeper treatment of the phenomenon requires the specification of details external to the focal industry. Starting from more recent and elaborate models of entry, some proposals for further advancement are put forth.

Land marketization and industrial restructuring in China

This study examines how land marketization without privatization in China influences industrial structure by utilizing China’s urban land transactions data from 2003 to 2015 and the data covering 29 industries in China’s industrial and manufacturing sector. The baseline panel-data analysis shows that a one standard deviation increase in the degree of land marketization will lead to a significant increase in the rationalization level of industrial structure, indicated by a decrease in the Theil index by 0.01, which is around 66.7% of the average annual change. The transmission mechanism is that land marketization boosts firm entry rate and market competition, leads to a lower proportion of state-owned enterprises, and also reduces the dispersion degree of firms’ TFP and improves the efficiency of resource allocation at the firm level. The systematic generalized method of moments and the instrumental variable approach are employed to deal with the possible endogeneity problem, and the main results are found to be robust. This study enriches our understanding of the reform of land marketization in developing countries: while maintaining land ownership unchanged, we can still make land use rights allocated through market means like auctions, which can result in a better industrial structure and a higher level of economic efficiency.

Reconstruction Aid, Public Infrastructure, and Economic Development: The Case of the Marshall Plan in Italy.

The Marshall Plan (1948-1952) was the largest aid transfer in history. This paper estimates its effects on Italy's postwar economic development. It exploits differences between Italian provinces in the value of reconstruction grants they received. Provinces that could modernize their infrastructure more quickly experienced higher increases in agricultural production, especially for perishable crops. In the same provinces, we observe larger investments in labor-saving machines, the entry of more firms into the industrial sector, and a larger expansion of the industrial and service workforces.

Влияние безработицы на динамику входа новых компаний

The state of labor markets and the unemployment rate are a factor influencing entrepreneurial activity and the processes of creating new firms. The article is devoted to the study of this issue on the example of the Russian economic model. The purpose of the article is to eliminate a gap in the Russian scientific literature associated with the lack of research on the impact of the unemployment factor on the entry of new firms. Using the example of statistical data of the Russian federal districts in the period 2005–2021, it was found that the entry parameters of new companies were characterized by a declining trend, with a sharp drop in times of crises (2009 and 2020). However, the multidirectional dynamics at the stages of recovery growth and local recessions were revealed. Modeling in paired regressions showed the nonlinear nature of the impact of unemployment on the dynamics of the entry of new firms. The results of evaluating the model with random effects showed the negative impact of unemployment on the entry of new firms on average for the entire analyzed period. In addition to the unemployment rate, significant factors in the dynamics of companies entry were the growth rates of real GRP, real monetary incomes of the population and the dynamics of the total number of companies in previous periods. The current economic situation requires increased attention to the situation in the regional labor markets and stimulating the business activity of Russian companies.

Estimating the effects of legalizing drug e-commerce

With the technological development the e-commerce channel began to spread to all sectors of the economy. In 2020 with the introduction of sanitary and epidemiological restrictions because of COVID-19 pandemic, many countries lifted the ban of drug e-commerce. Such changes are interesting from the point of view of health economics, and the opening of this sales channel significantly reduces transaction costs and increases the physical availability of drugs, especially in regions with low population density. The article attempts to evaluate the effects of legalization of online sales of drugs on price level and the degree of market concentration (the concentration of the 5 largest companies is used as a proxy), and also uses new methods to estimate the effects of legalizing e-commerce on drug markets. High rates of industry and drug market concentration can lead to a noticeable decrease in the availability of goods. Legalizing e-commerce can be seen as a way to reduce market concentration by facilitating market entry for small firms. The effects of lifting the ban on remote drug sales are estimated using regression analysis on panel data, cross-country matching, and synthetic control. Empirical estimates provide an overall picture of the effects of legalizing online drug sales. After allowing remote drug sales market concentration decreases, indicating a reduction in information asymmetry and switching costs. This effect is particularly important for countries with a high proportion of pensioners, for whom the switching costs are noticeably higher ceteris paribus. Allowing distance trade, due to reducing information asymmetry, drug pricing also slows down, that is, in addition to increasing physical accessibility, opening this channel also increases economic accessibility.

The role of aviation networks for urban development

AbstractCity officials are continuously working to attract airlines willing to fly to new destinations. The inherent expectation is that a more extensive aviation network stimulates economic growth. This paper investigates empirically the causal implication of this hypothesis. Using data on nonstop flights by origin and destination over the period 1984–2013, we propose a new measure for a metropolitan area's connectivity to the national aviation network. We then use this measure to investigate its contribution to local economic development, as captured by the growth in population, in total employment, in per‐capita income, and new firm entry. To ensure causality, we use instrumental variable methods that exploit geography and destination airports growth as a way to capture the exogenous variation in the likelihood to add new travel routes. Our results suggest that a metropolitan area's air connectivity, resulting from an expansive local aviation network, has a positive effect on population, on employment and on the number of businesses established in that location.

Suing the government under weak rule of law: Evidence from administrative litigation reform in China

There is a long-standing debate in the literature about the effectiveness of strengthening judicial independence in developing countries with weak rule of law. This paper exploits a recent Chinese judicial reform in administrative litigation, which changed the jurisdiction rule from intra-regional to trans-regional, to estimate the effects of improved judicial independence on protecting private entities against potential abuses of public authority. We find a significant increase in the probability of successfully suing local governments after the reform, especially when the defendants are more powerful government departments and when the plaintiffs are individual citizens with fewer legal resources than firms. But this effect is more limited for higher-level governments. The reform also results in increased case filings, prolonged trial time, and enhanced judicial quality. In addition, it raises the awareness of both governments and citizens about the rule of law, increases firm entry, and worsens general public attitudes toward local governments, at least in the short term. Our study highlights trans-regional jurisdiction as a new source of judicial independence in a party state and its potential limitations.

Digital highways and firm turnover

AbstractWe study the impact of ultra‐broadband (UBB) internet connections on firm entry and exit dynamics. These connections are based on optical fiber cables that link telecommunication operators to final users, allowing a significantly higher performance compared with traditional copper‐line networks. We leverage on a unique comprehensive dataset collecting municipality‐level information on broadband diffusion and firm turnover in Italy for the period of 2012–2019. Our empirical strategy exploits the staggered roll‐out of UBB, starting from 2015. Our identification strategy is based on an instrumental variable approach that exploits plausibly exogenous variation in the physical and geographical peculiarities of the telecommunication infrastructure. Results suggest that UBB increases firm exit, particularly for small firms. On the contrary, firm entry rises only in digital intensive sectors and in the most developed geographical areas. Our findings have important implications for the ongoing debate around the massive investments in high‐speed digital infrastructures, as they argue against the conventional idea that business activities equally benefit from last‐generation broadband technologies.

The effect of CEO prominence on cross-border acquisitions: An international entrepreneurship approach

Cross-border acquisitions and cross-border alliances are two of the most popular entry modes for firms, although each entails different levels of risk. In addition to its industry and location, a firm’s choice of entry mode may also be affected by its chief executive officer (CEO). We explore how a CEO’s level of prominence influences a firm’s entry mode choice. Studying the relationship between CEO prominence and firm entry mode choice is imperative because CEO prominence is a predictor of both an individual’s personality and their risk-propensity. We use data from US-based S&P 1500 firms to test how CEO media appearances influence a firm’s choice between cross-border acquisitions and cross-border alliances. The results indicate that prominent CEOs are more likely to engage in cross-border acquisitions than in cross-border alliances. Furthermore, this tendency increases when the CEO has broad managerial experience or international human capital.

Production in Urban Environments

Abstract We analyze an urban economy with free entry of firms in which prices differ across locations. We show that in a competitive equilibrium, land rent is determined such that firms produce at constant returns to scale point—at minimum average costs. (JEL codes: R32 and R38)