Do Incumbents' Mergers Influence Entrepreneurial Entry? an Evaluation

By Majumdar, Sumit K.; Moussawi, Rabih et al. | Entrepreneurship: Theory and Practice, May 2014 | Go to article overview

Do Incumbents' Mergers Influence Entrepreneurial Entry? an Evaluation


Majumdar, Sumit K., Moussawi, Rabih, Yaylacicegi, Ulku, Entrepreneurship: Theory and Practice


This analysis has evaluated the impact of mergers on new entrepreneurial firm entry in the territories of firms making up the local exchange sector of the United States telecommunications industry. An analysis of first and second mergers undertaken by the local exchange companies has revealed that where mergers occurred there was significantly lower entrepreneurial entry. The results have implications for policy, since the approval of mergers has been shown to lead to lower entrepreneurial entry where mergers occur, and the approval of mergers may serve to impede entrepreneurship. Hence, greater thought should be given to merger approvals so that entrepreneurship and the process of economic growth are not compromised as a result.

Introduction

In the United States, numerous incumbent local exchange carrier (ILEC) mergers have taken place in the telecommunications sector. These ILEC mergers were approved by the Department of Justice and the Federal Communications Commission (FCC). Their approvals have been consequential. One such consequence has been the consolidation of the local exchange sector. Simultaneous institutional changes have brought the presence of horizontal competition in ILECs' territories. The landmark Telecommunications Act of 1996 encouraged entry of new entrepreneurial firms to become horizontal competitors in the franchised territories of the ILECs.

This study evaluates the impact of the various approved mergers on new entrepreneurial firm entry in ILECs' territories in the United States. The analysis conducted strips out the impact of the Telecommunications Act of 1996. As a major institutional change, impacting industry structure, this legislation exogenously encouraged entry by potential competitors, as meant to by lawmakers. Controlling for other factors, the issue evaluated is whether after the approved mergers undertaken by the ILECs, there has been entry of new entrepreneurial firms in their territories. This is a key question, linking merger approvals and new entrepreneurial firm entry, at the heart of important debates in the public policy and entrepreneurship literatures.

A sizable portion of contemporary entrepreneurship research lies at the intersection between strategic management and public policy (Levie & Autio, 2011; Minniti, 2008). Entrepreneurs are considered the prime drivers of economic progress (Hughes, 1986; Leff, 1979), as they pursue opportunities, create competitive advantage (Ireland, Hitt, & Sirmon, 2003), and contribute to economic growth. Yet, they are subject to considerable contextual influences (Davidsson & Wiklund, 2001; Shane, 2003; Shane & Venkataraman, 2000). Social and political contexts influence entrepreneurs' attitudes, allocation of efforts, levels of resources to be mobilized, and dictate the constraints impinging on establishing an enterprise (Bowen & De Clercq, 2008; Harper, 1998; Martinelli, 2004). Consequently, the policy context materially impacts the nature, direction, rate, and extent of entrepreneurship (Welter & Smallbone, 2011).

In the last decade, a stream of literature has emerged suggesting that institutional factors prominently exercise contextual influence (Boettke, 2001; Wennekers & Thurik, 1999). Institutional factors order reality by providing meanings for actions (Thornton & Ocasio, 1999); but they also influence business outcomes (Meyer & Rowan, 1991) across regions (Reynolds, Miller, & Maki, 1995). Specifically, legal and regulatory institutional decisions, as described by North and Thomas (1973) and Olson (1982), materially influence entrepreneurs' perceptions, behavior, and performance (Baumol, 1990; Capelleras, Mole, Greene, & Storey, 2008; Olson, 1996).

Entrepreneurial decisions are influenced by institutional decisions because such decisions directly impact the generation and distribution of returns to entrepreneurship (Autio & Acs, 2010; O'Brien, Folta, & Johnson, 2003). …

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