Does New Entry Drive Out Incumbents? Evidence from establishment-level data in Japan

Author Name ITO Keiko  (Faculty Fellow, RIETI) /KATO Masatoshi  (Kwansei Gakuin University)
Creation Date/NO. May 2012 12-E-034
Research Project Productivity of Industries and Firms and Japanese Economic Growth
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Using establishment-level data in Japan, we examine the effects of new business entries on the probability of incumbents exiting the market. In particular, we estimate how the effects vary depending on the size of both the entrants and incumbents, which has not been explored in the literature.

We find that while new business entries increase the probability that incumbents will exit, the effect differs significantly across sectors and depends on entrant and incumbent size. Although small establishments are the most likely to be driven out by new entries in all sectors, large incumbents are not always the most competitive, and, in the case of the tradable services sector, medium-sized establishments are the least likely to be affected by new entries.

Moreover, our simple regression analysis shows a positive relationship between entry rates and employment growth in a region. New entries may promote resource reallocation and stimulate regional economies, possibly resulting in regional employment growth.