Introduction

Economists have long focused on the process of entry and exit of firms. Many have emphasized its importance in facilitating the adaptation of industry to change. In the simplest of expositions, the acts of entry and exit serve to equate above- or below-normal profits with competitive rates. In other models, potential rather than actual entry serves to limit monopoly power. At one time included under the rubric of limit-pricing models, this argument has more recently been given theoretical elegance by contestability theory. The turnover that results from exit and entry is also seen as a conduit through which new ideas and innovations are introduced.

This view of entry is not shared by all. To some, the lack of entry indicates that entry is unimportant. Others have portrayed entry as an interesting but irrelevant curiosity. One such view depicts entrants as fringe firms that swarm into and out of an industry without having much impact. References to the entry and exit process as “hit-and-run” leave the impression, intentional or otherwise, of an unstable fringe that makes no contribution to such indicators of progress as productivity. Shepherd (1984), in a criticism of contestability theory, stresses that entry as an external force is usually secondary to internal conditions within an industry in determining the strength of competition.

The economics profession has offered a varied fare on its competition menu. Some have utilized an axiomatic approach to explaining perfect competition. Others have tendered the recipe as something workable though not perfect. Case studies have delved into the operations of particular markets. Hypotheses have been tested about the effect of market structure on performance. Market structure has received considerable attention – indeed, there has been so much food for thought that many of the audience have become satiated. Market performance has been studied but remains unconnected to underlying processes. The effect of innovation and technological change has provided the food for other courses.

There remains a serious gap in our empirical knowledge. There have been few attempts to measure the dynamics of competition – to study the internal dynamics of markets on a broad cross-sectional basis. We have only partial information on the importance of entry and exit, turnover due to mergers, and change in the incumbent-firm population and how it relates to performance. The topic has not been completely ignored by the profession. Partial insights have been offered by case studies that were limited in their generalizations and by simulations suffering from a lack of empirical evidence to sort out the important from the unimportant variants contained within them.

The gap in our understanding of the underlying dynamics of a broad range of industries is serious for a discipline that tries to combine analytical rigour with relevance.

This book focuses on the nature of the competitive process. Canada was chosen to illustrate how this process functions because a unique database permits analyses that are not possible for most other countries. The Canadian experience should not, however, be regarded as atypical. To illustrate this point, this chapter focuses on the extent to which competition in the United States is similar to that in Canada. It compares the dynamics of growth and decline in the two countries’ manufacturing sectors by measuring the rate of job growth among entrants and growing plants, and the rate of job destruction among exits and declining plants.

In the past, industrial economists have used international comparisons to examine the connection between market size and firm or plant size. Other studies have examined the extent to which international differences in concentration are rooted in production technology or are related to differences in market size.

The difference in the sizes of Canadian and U.S. markets, along with other factors such as tariff protection, have long been cited as reasons for differences in the intensity of competition. Considerable Canadian research, therefore, has focused on the connection between smaller markets, openness to trade, and the effects of oligopolistic coordination operating behind tariff barriers (Hazledine, 1990). These studies have focused on the determinants of price differences (Hazledine, 1980), differences in scale and diversity (Baldwin and Gorecki, 1987a), and differences in productivity (Caves et al., 1980; Baldwin and Gorecki, 1986a). The current comparison of the differences in job creation and destruction that are captured by turnover measures provides a dimension that has not previously been examined.

Industrial economics has a long empirical tradition. In order to contribute to it, this study provides new data on various facets of the internal dynamics of industries. It outlines the nature and the amount of dynamic change in an industry and describes how this change affects industry performance.

The evidence presented here tells us much about the competitive process. In doing so, it provides new insights and an improved understanding of phenomena that have long furnished the main fare for study in industrial economics.

New insights are provided into the way in which the various pieces of the various processes are put together. New data enable a more precise and comprehensive picture of the importance of entry and exit to be assembled. Both short- and long-run time periods are used to measure entry and exit. Facets of both greenfield and acquisition entry are described. The study also sets the process of entry and exit side by side with growth and decline in incumbent firms so that both their individual and their combined importance can be evaluated.

The study looks not just at the amount of turnover, but also at the effect of turnover on various measures of performance. It shows the relationship of turnover to productivity, efficiency, and profitability. By doing so, it confirms the importance of turnover and turnover measures. Together entry and exit along with growth and decline in the incumbent sector shift substantial amounts of market share from losers to gainers. Substantial productivity gains accompany this process.