Entry and exit by new versus existing firms

Firms relocating across industries or product lines are empirically relevant in industry dynamics: they account for 22% of exit; and two-thirds of surviving firms alter their product mix every 5 years. Yet, existing theories of industry dynamics focus exclusively on new entrants and assume that firm exit is synonymous with failure. This paper proposes a model that incorporates entry and exit by both new and existing firms into a standard framework of industry dynamics. There are two forms of exit: a firm may shut down by selling its assets to earn their salvage value, or reallocate its assets at a cost to enter another industry or product line. In equilibrium, a low-skill firm shuts down from and a high-skill firm transfers out of an industry with a low state of demand. We show the model is consistent with a series of stylized facts pertaining to the entry and exit patterns of new versus existing firms. (C) 2008 Elsevier B.V. All rights reserved.