Entry, Learning, and Industry Evolution

Carnegie Mellon University, Pittsburgh PA

Investigators

Abstract

Three projects concerning the conditions that lead firms to enter new industries and that cause industries to be concentrated in narrow geographic regions are conducted. The first project analyzes the circumstances that lead employees of existing firms to leave and start competing firms in the same industry. Employees of incumbent firms are assumed to learn useful technical and marketing knowledge in the specialized domains in which they work for their employers, which they exploit in starting their own firms. Better performing firms are assumed to be richer learning environments, leading them to spawn more and better-performing employee startups. Employee startups thus serve to diffuse knowledge to new organizations, thereby increasing the strength of the competitors in an industry. These ideas are tested using data that builds on data collected in a prior NSF project on all entrants into the automobile and laser industries. For each industry, various predictions concerning the types of firms that spawn more employee startups, the market conditions that are conducive to such startups, and the relationship between employee startups and the prior experiences of their founders are tested. The second project analyzes the potential of a rare chance event, namely the location of a few very successful early entrants in the same region, to profoundly affect the evolution of the geographic structure of an industry. This can occur through the employee startup process envisioned in the first project. If employee startups drive regional concentrations, it implies that regional public policy efforts to promote industry concentrations should focus on facilitating employee startups. The importance of employee startups in regional industry concentrations is tested using the data compiled in the first project on the automobile industry, which became heavily concentrated around Detroit, Michigan. The location and heritage of every automobile producer is traced to test the extent to which the success of the Detroit producers was concentrated in firms that either directly or though other employee startups can be traced back to four of the most successful early automobile entrants, Olds Motor Works, Cadillac, Buick, and Ford, all of which located in the Detroit area. The last project explores how learning from experience leads firms to expand the repertoire of activities they conduct within industries. It is conjectured that as firms learn about the core technologies of an industry, they expand their efforts into new activities that are more challenging to master. This perspective can account for patterns in the way firms grow and also why the leaders of industries tend to produce the broadest array of the industry's products. It also implies that older and more qualified firms are the first to diversify into new industry domains created by innovations, which contrasts with recent theories about how innovations can lead to turnover in the leaders of an industry. The theory is tested using the data for the automobile and laser industries and also using data for part of the history of the tire industry developed in the same prior NSF project. The empirical examination probes the kinds of innovations that pose the greatest challenges to an industry's leading firms versus those that reinforce the positions of the industry's leaders.