Although theoretical analysis of new firm competition has shown that the simple threat of entry may exert a disciplinary role as strong as actual entry, empirical work seems to have reached the conclusion that the disciplinary role actually played by new competition is rather modest. The main reasons are that new entrants are generally small and typically compete with other small (and in most cases also new) firms, rather than challenging the dominant firm's market; and that their life is frequently too short for them actually to become a threat to market leaders. In Discussion Paper No. 1203, Research Affiliate José Mata, Pedro Portugal and Paulo Guimarães examine the longevity of entrants on the basis of Portuguese data.

Econometric duration models are used to ascertain the effect of plant size and market dynamics variables on the survival of new plants. The main findings are: plant size exerts a negative effect on the instantaneous failure rate; current size is a better predictor for plant failure than start-up size; and plants that have grown face a lower exit probability than otherwise identical units. This last result is particularly relevant for plants established by newly created firms. In addition, the competitive environment is an important factor for new plants. The higher the rate of plant creation, the lower the expected life span of new units. Industry growth exerts a positive influence on the life prospects of new plants, an effect that is clearly attenuated when fast growth is combined with considerable entry flows.

The Survival of New Plants; Start-up Conditions and Post-entry Evolution
José Mata, Pedro Portugal and Paulo Guimarães

Discussion Paper No. 1203, June 1995 (IO)