Interdependencies in the Dynamics of Firm Entry and Exit

Kristina Nyström Jönköping International Business School P.O. Box 1026 SE-551 11 Jönköping Sweden E-mail: [email protected] (Competing for the young economist award) Abstract: This paper investigates the dynamics of firm entry and exit with a focus on differences between industrial sectors. The paper discusses how entry rates in industrial sectors are affected by previous exit and entry rates and how exit rates in industrial sectors are affected by previous entry and exit rates. Economic theory presents two different approaches to how entry and exit of firms are interrelated to each other, the multiplier effect and the competition effect. This paper intends two investigate which force that are the predominant one. The empirical analysis is based on data for 25 Swedish manufacturing industries at the 2-digit SIC-level, for firms with more than five employees during the period 1991-2000. A dynamic panel data approach as suggested by Anderson and Hsio (1981) and Arellano and Bond (1991) are used in estimating the relationships. The empirical results find some evidence of the multiplier effect being the predominant effect explaining entry while competition effects are more important for explaining exit patterns.