What factors inspire the high entry flow in Taiwan's manufacturing industries–A count entry model approach

Abstract

Why is the entry flow of the manufacturing sector extremely high in Taiwan, and does it contribute to the prevailing entrepreneurship? This article aims to explore what factors inspire potential entrants to go into an industry. Based on a theoretical formulation of the Poisson probability entry model, a count data model is employed to investigate the determinants of entry flows. The empirical results reveal that traditional entry barriers indeed lower the entry flow. The entry incentives, including price cost margin and industry growth, play a lesser role at attracting new firms, while alternatively the market size acts as a better proxy of an entry incentive in explaining entry flows. Incumbents’ responses to entry, R&D and advertising intensity are found to be associated with a significant negative impact on entry flows. This article also finds that there is a higher bound of covariate of entry, about 10%, that can be attributed to the immeasurable personality of entrepreneurs–entrepreneurship.

Rather be the chicken's beak than be the cow's behind. 1

¹ This proverb explains in terms the concept of choosing jobs as how one would like to be a leader of a small firm rather than an employee in a large enterprise.

The trade that might cause life hazard will be dealt, while the trade that might cause a loss will not be dealt.

Two traditional Chinese proverbs

Notes

¹ This proverb explains in terms the concept of choosing jobs as how one would like to be a leader of a small firm rather than an employee in a large enterprise.

² The Fair Trade Law of Taiwan was enacted in 1992.

³ For the development of the theoretical literature on the entry model during the pre-1990s, see Geroski (1995).

⁴ For an earlier survey, please refer to Siegfried and Evans (1994) and Geroski (1995).

⁵ There are limited studies discussing the interaction between entry and exit in Taiwan's manufacturing sector, such as Lin et al. (2002) and Lay (2003).

⁶ Geroski (1995) offered a comprehensive survey of the literature.

⁷ The entrepreneurship embodied in this model can be traced back to Kirzner's (1973) concept of the entrepreneur. He focuses on the market process and argues that economic agents have to change their minds continuously and this generates a dynamic process. Opportunities are abundant in a situation of disequilibrium, and hence the entrepreneur as an arbitrageur who equilibrates markets was born. The other concept of entrepreneurship is Schumpeter's (1939) entrepreneur who is the innovator and the creative destroyer of equilibrium.

⁸ See Berry (1992) for a proof.

⁹ The value of is assumed to be an integer.

¹⁰ See Thomas (1999) for a survey.

¹¹ Theoretically, as the variables are considered to be endogenous, the estimation should be implemented using instrumental variable techniques–for example, using a lagged entry rate as the instrumental variable. A lack of earlier data prevents us from experiencing the estimates in this study.

¹² The SEs in column (1) are usually maximum likelihood SEs that are not heteroscedastic-consistent estimates.

¹³ ln EXP is also excluded due to the high correlation between industry sales and exports.

¹⁴ This result can also explain the phenomenon for why we can see that there is a huge amount of foreign firms entering mainland China's market, even though the average profit rate of firms operating there in China is not higher than that in other developing countries.

¹⁵ Acs and Audretsch (1990) also found a positive sign for this variable, and their explanation is that this variable can be considered as a proxy for technological opportunity rather than the incumbents’ deterring strategy.