Working Paper Series in Economics and Institutions of Innovation,
Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies

Abstract: Schumpeter claimed the entrepreneur to be instrumental for creative destruction and industrial dynamics. Entrepreneurial entry serves to transform and revitalize industries, thereby enhancing their competiveness. This paper investigates if entry of new firms influences productivity amongst incumbent firms, and the extent to which altered productivity can be attributed sector and time specific effects. Implementing a unique dataset we estimate a firm-level production function in which the productivity of incumbent firms is modeled as a function of firm attributes and regional entrepreneurship activity. The analysis finds support for positive productivity effects of entrepreneurship on incumbent firms, albeit the effect varies over time, what we refer to as a delayed entry effect. An immediate negative influence on productivity is followed by a positive effect several years after the initial entry. Moreover, the productivity of incumbent firms in services sectors appears to be more responsive to regional entrepreneurship, as compared to the productivity of manufacturing firms.

Keywords: entrepreneurship; entry; business turbulence; incumbent firms; productivity; region; business dynamics

JEL-codes: D20; L10; L26; O31; R11

27 pages, August 25, 2011

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