Determinants of New-Firm Formations in Manufacturing Industries: Industry Dynamics, Entry Barriers, and Organizational Inertia

By Dean, Thomas J.; Meyer, G. Dale et al. | Entrepreneurship: Theory and Practice, Winter 1993 | Go to article overview

Determinants of New-Firm Formations in Manufacturing Industries: Industry Dynamics, Entry Barriers, and Organizational Inertia


Dean, Thomas J., Meyer, G. Dale, DeCastro, Julio, Entrepreneurship: Theory and Practice


Research examining the determinants of venture creation has recently been termed the rates approach (Aldrich & Wiedenmayer, 1991; Aldrich, 1990). The central purpose of rates research is to investigate the social, economic, and political environmental conditions that influence variance in organizational foundings (Aldrich & Wiedenmayer, 1991). Studies on the determinants of organizational formations can be further classified according to the source of variance which they explain. Some studies attempt to analyze variance across regions or societies while others look to describe variance across industries or populations of firms.

Research investigating variance across regions or societies usually examines supply determinants of organizational formations. Supply factors, sometimes termed push factors (Shapero & Sokol, 1982), refer to the "non-materialistic, inner, psychic" motivations of individuals as well as the "larger systems of sanctions based on the society's value and status hierarchy" (Kilby, 1971, p. 4). Studies analyzing variance across industries or populations of firms usually focus on demand determinants of organizational formations. Demand determinants of venture creation concern the monetary incentives that exist within the economic system (Glade, 1967; Kilby, 1971). Individuals wishing to optimize economic rewards will pursue such opportunities through the formation of a business venture. Demand factors have also been termed pull factors (Shapero & Sokol, 1982), since they attract individuals to initiate new businesses.

Relative to investigations of supply determinants, research on demand determinants has been rare. The emphasis on trait-oriented research has contributed to the empirical and theoretical neglect of the study of demand determinants (Aldrich & Wiedenmayer, 1990). Yet, researchers see demand determinants as being at least as important as supply determinants (Glade, 1967).

In order to overcome this historical deficiency in entrepreneurial research, this paper describes a model of the demand determinants of business formations. The model attempts to explain the variance in rates of foundings across industries or markets. It integrates ideas from a number of perspectives including Austrian economics, organization theory, strategic management, and industrial organization economics. Propositions and specific hypotheses are presented. It is important to note that the model was developed primarily for manufacturing industries and may not be applicable to other types of markets. Hopefully, the model will stimulate further theoretical development as well as encourage empirical studies on demand determinants of organizational formation.

THEORETICAL FRAMEWORK

Since demand determinants of organizational foundings concern the monetary incentives of entrepreneurship, investigations of pull factors are best approached from an economic perspective. However, mainstream economists have readily admitted their inadequacy in dealing with the entrepreneur and his/her role in the economy (Baumol, 1968). Part of the economists' difficulty has resulted from a somewhat narrow focus on formal analytical models of general equilibrium. Within the theory of general equilibrium, the entrepreneur serves no purpose other than that of the rationally optimizing manager (Rizzo, 1979; Hayek, 1948; Kirzner, 1973). Entrepreneurship by its very nature is not easily subjected to the deterministic analysis usually applied to general equilibrium (Baumol, 1968; Kirzner, 1973).

Yet some economists have treated the entrepreneur with a great deal of effectiveness. Theories of the Austrian school (i.e. Kirzner, 1973; Mises, 1949; Hayek, 1948), and those of Schumpeter (1934), Leibenstein (1979), and Knight (1921), for example, have been invaluable to the current understanding of entrepreneurship. By ignoring many of the assumptions of general equilibrium theory, many of these authors have been successful in describing the phenomenon of entrepreneurship. …

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