Lecture 5 in-class notes

What are the three approaches on how industires change & evolve?

Industry dynamics

Industry life cycle

Evolution of industris & sectoral systems

(in order of ascending complexity)

Industry dynamics focus (3 aspects)

Entry of new firms

Exit of existing firms

Firms’ growth

(in a quantitative matter)

Industry dynamics stylized facts

1. Entry and exit are common

2. Entry and exit are mostly by small firms

3. Entry and exit are correlated (Revolving door)

4. Exit commonly occurs quite soon

5. The new firms that survive grow

Why do firms enter?

Opportunity of profit! Cycle:

• In perfect competition market:

  • Why are there profits if there is perfect competition?

    • Shock in demand, supply, change in technology that reduces the cost.

• If profits increase:

  • Outsiders will want to enter

  • This will cause the price to reduce

  • Market goes back to equilibrium

• Repeat

Factors Affecting Entry

• The industry's high profits

• Demand growth

• Low barriers to entry

• Low switch costs for consumers

• Availability of financial resources

• Level of regulation

• Scientific and technological opportunities

New Innovative Firms

Firms that enter a technology or sector for the first time with an innovation, measured by patenting.

SCH I industries > technological entrants than SCH II industries

New patenting firms vs “de novo” new patenting firms

“de novo” new patenting firms = those who have NEVER EVER patented before, in any technology

New patenting firms = those who have patented before, but in a different technology

Main Obstacles to Innovation for new innovative firms

• No economies of scale

• Troubles regarding organizational aspect

• Lack of strong relationship with suppliers

• Less access to specialists in the field

• Lack of reputation

• Lack of financial availability

Exit (3 basic forms)

1. Relocation & restructuring:

   • E.g. close a plant in USA and open in Italy instead

2. Business closure

   • Voluntary liquidation or bankruptcy

3. Mergers and acquisitions

   • Transfer of ownership, but production capacity remains within the industry.

Modes of exit (2)

1. Revolving door

   • Liability of newness, small new firms

2. Creative destruction

   • More evenly distributed - can be small, large, new or old firms

Types of entrants (2)

Start-up

Spin-off

Spin-offs

Independent start-ups that originate from existing firms within the same industry.

Types of Spin-offs

Intra-industry spin-offs, corporate spin-offs, and academic spin-offs

Stylized Facts of Spin-offs (4)

1. Spinoffs have better performance than other de novo entrants

2. The relation between the age of parents and their spinoff generation rate has an inverted U-shape (see graph below)

3. High-performing parents have higher spinoff generation rates

4. High-performing parents generate high-performing spinoffs

Explain inverted U-shape relation between age of parent firm & amount of spin-offs

• At the beginning, the firm is new and there aren’t many employees in the first place for anyone to spin off.

• Increase of age = + employees = + spinoffs

• But it goes back down. why?

  • Market saturation. More mature market, so there is less incentive to create something new.

  • Company could become less innovative, more routinized.

  • Employee loyalty = if you’ve been an employee for long, you tend to be more loyal

  • Loss of employees and knowledge.

Motivations Behind Innovative Spin-offs

• Cannibalization

• Non-receptive, non-attentive organizational culture

• Principal Agent: I want to profit fully from my idea, rather than just getting a small promotion!!

• Different views, cognitive frames, perceptions, etc.

• What I want to make is out of the scope of the firm!

• Different expectations

Reasons for a Spinoff (parent firm’s pov)

1. Agency Theory:

2. Cannibalization:

   • Rejected - may cannibalize an existing product

3. Disagreement:

4. Learning in Rigid Organizations:

   • Inventor learned skills within company, then moves since the firm is rigid

Industry Life Cycle

1. Start/emergence

2. Growth

3. Maturity

4. Discontinuity in technology, markets or industrial actors

Possible Trigger Event of a New Industry (4) (Agarwal, Moeen and Shah, 2017)

1. RADICAL PRODUCT INNOVATION

2. SCIENTIFIC OR TECHNOLOGICAL DISCOVERY

3. UNMET USER NEEDS

4. MISSION ORIENTED GRAND CHALLENGES

Incubation Stage

Period between the introduction of a discontinuous change & the first instance of commercialization.

Usually 26-28 years

Coevoluation (Nelson 1994)

Affect the evolution of an industry

E.g.; Technology affects firms’ capabilities & strategies, but at the same time firms affect technological change

Feedback very important!!

Evolution of Sectoral Systems

The evolution of industry sectors and the interplay between technologies, firms, and markets within these sectors. It involves the emergence of new technologies, technological and market discontinuities, and the formation of related industries and value networks.