Promoting the Entry
of New Firms
Federico Pablo Martí
Small Business Economics
22: 209–221, 2004.
2004 Kluwer Academic Publishers. Printed in the Netherlands.
ABSTRACT. Although in the beginning the entry in the
market of new companies has a positive effect on production
and employment, the results don’t seem to be so obvious in
the long term. On the one hand, the possibilities of survival
of the new companies are very scarce, on the other, the new
companies that survive expel the less efficient incumbents
from the market.
The results of the simulations show that the effects of the
policies on the population of firms in the long term are quite
small because the policies are strongly limited by the pressure
that the new companies cause on the established ones. On the
other hand, the policies favor an increase in productivity but
in a different way depending on whether they favor the
rotation or not.
In many European countries, and from the
European Commission, diverse policies have been
developed to favor the creation of new companies,
especially small and medium-sized ones, to reduce
unemployment and to increase productivity.
Although the promotion of the creation of new
companies has been an industrial policy much
used, researches into the effects of these measures
in the long term are scarce, especially from the
point of view of the whole market and not only
of those firms that have directly received public
help. They are mainly centered in the results and
possibilities of survival of the new firms and leave
aside the effects that take place on the incumbents.
If a promotion policy gets an increase in the
number of new companies, it cannot be considered
that the sum of the workers of the new companies
is the net effect in employment because the
possibilities of the survival of new companies are
very scarce and the survivors expel the less
efficient incumbents from the market. On the other
hand, as the expelled companies are generally
more intensive in labor than the new ones, the net
effect on employment can be even smaller.
The objective of the paper is to analyse the
incidence in the long term of some policies of the
promotion of new companies from a perspective
of markets mobility. The model used is compat-
ible with the abundant research carried out from
the main approaches to the dynamic of markets:
in the first place, the wide and often dispersed
descriptive literature on the topic (Dunne et al.,
1988; Baldwin, 1995); in second place, the liter-
ature based on the industry life cycles (Klepper,
1996; Afuah and Uterback, 1997) and, lastly, that
related with the population ecology of organiza-
tions (Hannan and Freeman, 1989; Carroll and
In this work four of the most used promotion
measures for the creation of companies are
analysed by means of agent-based simulation:
reduction of the entry barriers, financial help for
companies in crisis, trade protection and help for
the growth of firms.
The effect of the reduction of the entry barriers
is seen through three different policies:
Policy 1 considers that an increase of the gross
rate of entry of an exogenous character takes
place. That is to say, that the entries increase with
independence of the observed profitability of the
market. An example of this kind of policy is any
reduction in bureaucratic obstacles.
Policy 2 supposes, to the contrary, that the
answer of the entries regarding the profitability
of the market increases. This is the case of a reduc-
tion in the financial costs for example.
Final version accepted on October 15, 2002
Universidad de Alcalá
Dpto. De Estadística
Estructura Económica y O.E.I.
Plaza de la Victoria, no. 2