Why are so many firms sub-optimal? Primary aim: An empirical foundation of evolutionary processes

Puzzles to Industrial Economists: The bulk of firms in most industries are operating at a suboptimal level of output Entry of new firms are not deterred in industries, where scale economies play an important role

MES in US and Japanese manufacturing sectors United States Japan MES Subopt. MES Subopt. (employees) plant share (employees) plant share Sector Food Furniture Paper 1.o Electrical Equip- ment

Haldane’s dilemma once again Calculations to be made by a policy-maker Social costs due to loss of potential output during the period while the unfit mobs are being eliminated (IP: Procedures for rewarding industrial research that speed up innovative activities) Social costs due to the fact that economic agents are eliminated in the process of competitive selection (IP: Offer training and education to unskilled workers)

Audretsch´s examinations are based on other scholars The probability of a business exciting increases with the gap between its level of output and MES, i.e. the probability of exit for a suboptimal business diminishes in markets where growth is greater Firm growth should be greater, but the probability of firm survival lower, in industries in “a higher technological opportunity class”

Audretsch’s own empirical results 1) Start-up size is negatively related to firm growth but positively related to the likelihood of survival, i.e. the gap between MES and actual size spurs the firms to expand. In addition, the probability for survival decreases with this gap. 2) 1) implies that new firms that survive grow faster in innovative industries 3) The probability of a business exciting an industry decreases with increasing age 4) The survival rates of establishments in the high- and the low-technological opportunity classes are less than in moderate-technological opportunity classes. 5) Both in Japan and in the USA, the firms buy the time needed for launching their new ideas and for learning by applying “compensation strategies” (reduced level of employee compensation)