Review of Industrial Organization 15: 283–301, 1999.
© 1999 Kluwer Academic Publishers. Printed in the Netherlands.
Microeconomic and Macroeconomic Inﬂuences on
Entry and Exit of Firms
Helsinki School of Economics, P.O. Box 1210, FIM-00100 Helsinki, Finland
Bank of Finland, Finland
Abstract. We examine the entry and exit process in the Finnish manufacturing industry using a
six year panel of three-digit industries. The results show that scale economies form a signiﬁcant
entry barrier, but the evidence on their role as an exit barrier is weaker. Industry growth has a positive
inﬂuence on entry and a negative inﬂuence on exit, but also variables describing the general economic
climate have an inﬂuence on the entry-exit process. The variables describing the monetary transmis-
sion mechanism have an expected inﬂuence on entry. However, the role of macroeconomic inﬂuences
on exit is inconclusive. Both entry and exit have almost unit elasticity with respect to industry size,
measured by the number of ﬁrms in the previous period. Entry and exit rates are therefore practically
independent of industry size.
Key words: Entry, exit, monetary transmission mechanism.
JEL Classiﬁcation: L11, L60.
The turnover of the population of ﬁrms through the birth of new ﬁrms and the death
of existing ﬁrms has been under much discussion in recent years both in academic
research and in policy discussions in most industrial countries.The persistence of a
high rate of unemployment has created hopes of solving the problem through job
creation especially in newly established small and medium sized enterprises.
The turnover of ﬁrms is important for other reasons also. Entry of new ﬁrms
helps to maintain competition and hence efﬁciency. Changes in ﬁrm structure con-
tribute to a growth in productivity since new ﬁrms typically represent newer tech-
nologies and exiting ﬁrms have older, less productive technologies. Finally, the role
of new ﬁrms is important in innovation. The creation of new ﬁrms is important to
promote industrial competitiveness and structural change from traditional indus-
tries to high-tech areas. Since high rates of entry typically coincide with high rates
of exit, one also has to consider exits when evaluating the impact of ﬁrm births.
We are grateful to the editor and the referees for useful comments.