WASHINGTON, D.C. – New entrants in local economies at first harm, then help, already existing firms, according to a working paper released today by the Office of Advocacy of the U.S. Small Business Administration. The paper examines how the entrance of new establishments within a 150-mile radius of young firms affects the existing firms’ profitability.
“The benefits from a growing and dynamic local economy are clear,” said Dr. Chad Moutray, Chief Economist for the Office of Advocacy. “For local business, in the short term new entrants are competitive foes, but in a few short years they learn to cooperate with each other. This certainly has implications for local economic development strategies.”
The working paper, ”’Friends or Foes: The Spatial Dynamic Between Established Firms and Entrants,”’ written by Lawrence Plummer with funding from the Office of Advocacy, examines whether new establishments harm existing firms’ profitability due to increased competition, or help increase profits due to positive spillover effects. The complete paper is located at http://www.sba.gov/advo/research/wkpapers.html
Interestingly, the paper finds that the effect of new entrants is not an either/or proposition. In the first year of entry, the effect on existing firms’ financial performance (return on assets) is negative. However, after three years the effect on performance reverses and becomes positive.
The Office of Advocacy, the “small business watchdog” of the federal government, examines the role and status of small business in the economy and independently represents the views of small business to federal agencies, Congress, and the President. It is the source for small business statistics presented in user-friendly formats, and it funds research into small business issues.
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