Entry Regulation and Persistence of Profits in Incumbent Firms
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Entry Regulation and Persistence of Profits in Incumbent Firms Sameeksha Desai1 · Johan E. Eklund2,3,4 · Emma Lappi2,3 Accepted: 13 September 2020 / Published online: 26 September 2020 © The Author(s) 2020
Abstract In line with the theory of creative destruction, industries where incumbent firms generate high profits will attract entry, which should drive down profits. This disciplinary effect of entry implies that profits above the norm should not exist in the long run. Factors that affect entry—such as entry regulations—could affect this profits convergence process. Using an unbalanced panel of firm- and country-level data for approximately 13,000 firms in 33 countries between 2005 and 2013, we examine the profit dynamics of incumbent firms in the context of entry and entry regulations. Keywords Entry · Entrepreneurship · Entry regulation · Profit · Incumbent firm · Creative destruction JEL Classification L00 · L22 · L25 · L4 · O32
1 Introduction A central theme in the industrial organization research is on the determinants of the set of firms in an industry, including how barriers to entry shape the competitiveness of markets and their trajectories (see Einav and Levin 2010). Research within the industrial organization literature raises questions, such as how markets look different * Emma Lappi [email protected] Sameeksha Desai [email protected] Johan E. Eklund [email protected] 1
Indiana University, 1315 E 10th St., Bloomington, IN 47405, USA
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Swedish Entrepreneurship Forum, Grevgatan 34, 3rd Floor, 114 53 Stockholm, Sweden
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Jönköping International Business School, P.O. Box 1026, 551 11 Jönköping, Sweden
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Blekinge Institute of Technology, 371 79 Karlskrona, Sweden
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from theoretical endpoints such as perfect competition, and how conditions that are related to scale economies, transaction costs, and the strategic behavior of firms unfold (see Einav and Levin 2010). A stream of the literature examines how firms can maintain high profits: the persistence of profits (Geroski and Jacquemin 1988; Glen et al. 2001; Goddard and Wilson 1999; Mueller 1977, 2003; Pakes 1987; Waring 1996), in the context of entry and exit barriers (see Bain 1956). The dynamic Schumpeterian view of entrepreneurship and competition advances the process of creative destruction, wherein incumbent firms and new entrants are theorized to seamlessly respond to market forces (Schumpeter 1942, 1934). In this view, entrepreneurship is considered crucial, and new firms are theorized to put pressure on incumbent firms to do things such as innovate, reduce prices, and provide greater value to consumers. This implies that new firms play a type of disciplining role and those firms that can compete will survive, whereas those that cannot, will eventually exit. The Schumpeterian “perennial gale of creative destruction” (Schumpeter 1942) in an environment without barriers to entry and exit would be theoretically costless. The ability of incumbent firms to maintain high profits i
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