Academic journal article Journal of Economic Cooperation & Development

Determinants of New Firm Formation: Evidence from Iranian Manufacturing Industries

Academic journal article Journal of Economic Cooperation & Development

Determinants of New Firm Formation: Evidence from Iranian Manufacturing Industries

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1. Introduction

In 1934 Schumpeter's "creative destruction" hypothesis made a potential revolution in economics. He commented that creative destruction is the key driver of changes in technology and industrial landscapes in a market economy. In this process, entering entrepreneurs introduce new technologies, products or services to markets and force the exit of incumbents whose offering become obsolete (Pe'er and Vertinsky, 2008). This phenomenon is also important for another reason. Entry of new entrepreneurs helps to maintain competition and hence increasing efficiency (Ilmakunnas and Topi, 1999) and represents a changing pool of potentially strong competitors, viz, the seedbed of new activities from which will emerge the successful business and industries of the future (Carree and Thurik, 1999). Thus, entry may be considered as highly important in increasing competitive room and consumer welfare. Nevertheless, entry rates of firms differ strongly across industries and over time (Herck 1984, Dunne, Roberts and Samuelson 1988). There has been a long-standing interest in determining features which explain these differences. In empirical studies this variation in the intensity of the selection process by which incumbents are displaced by new entrants is explained by variation in profitability and variation in the height of entry and exit barriers (Carree and Thurik, 1996). In fact, entry has been found to be positively related to growth in many studies (Orr 1974, Górecki 1975, Duetsch 1984, Khemani and Shapiro 1986 and Highfield and Smiley 1987). Most of these studies also found lagged profits to exert a positive influence on subsequent entry, with the exception of Orr (1974). Following the recommendation of Sleuwaegen and Dehandschutter (1991) export share which is an indicator for the ability of industry in competition with foreign markets, has positive impact on entry. While the role of capital intensity as a barrier to entry is well recognized in the studies by White (1982), Duetsch (1984) and Khemani and Shapiro (1986), no such effect was specified in a survey conducted by Highfield and Smiley (1987). As a consequence, these conflicting results have not only created confusion among scholars about the response of the question "What determines entry?" but they have also made it difficult for policy makers to look at these emerging literature for policy guidance (Sutaria and Hicks, 2004). For an entrepreneur who consider to start a business it is important to know where to locate. Industrial factors can change the decision to enter or not. Furthermore, cognizance of entry determinants to shed some lights on the way of politicians is a valuable effort that has got less attention in Iran. This paper intends to give a deeper understanding of the factors affecting entry in Iranian manufacturing industries during 2002-2006.

The setup of this paper is as follows: Second section as usual refers to some previous related literature. Section III is used to provide an overview of the data set and industry selection process. In section IV, the empirical model and variables are introduced. Section V describes the results of estimation. Section VI concludes and recommends policy and suggestion for future research.

2. Literature survey

The basic valuable effort on entry can be attributed to Bain's (1949) pioneering study, who shaped the foundation for large body of research. Although, from the early 1950s up to now, investigating the relationship between entry and economic factors have received a great deal of attention but as Mansfield (1962) argued "Because there have been few econometrics studies of the birth, growth and death of firms, we lack even crude answers to the following basic question: what are the effects of various factors on the rates of entry?"

Despite this critic, evidence show many authors investigate the entry determinants and their effects. A quick glance on literature guides us to the fact that, this notion has received a great deal of attention in developed countries. …

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