AN URBAN APPROACH TO FIRM ENTRY:

THE EFFECT OF URBAN SIZE

by Arauzo and Teruel

Aykut AYMELEK Elif TOPÇU

Neşe UYANIK Selçuk SAKARYA

OUTLINE

• Introduction• The effects of the Territorial

Factors to Firm Demography• Firm Creation and Urban

Environment• Spanish Case• Model and Results• Critics and Suggestions• Turkish Case

• This article explores the determinants of firm entry in Spanish municipalities.

• The authors consider that size is an important determinant of a city’s capacity to attract new manufacturing firms.

• This article contributes to the literature on market entry because most previous contributions have focused on regional factors rather than urban ones.

• The main idea of this article is that urban areas are not neutral to market dynamics and firm entry decisions.

• Municipalities play a key role in firm entry and entry patterns differ according to urban size.

• The smaller the firm, the greater effects external economies have.

Some scholers consider urban issues as explanatory variables,

• urban heteroginity,• different regional typologies• characteristics of the municipality• the local labor markets as territorial areas• the percentage of the state’s population living in urban

areas.

Product Cycle Theory• new products (and new firms) are created mainly

within the large metropolitan areas, where there is an innovating environment and skilled labor.

• Later, once products have reached maturity (when the introduction of new technology stops),

• production is decentralized toward smaller municipalities, where firms can benefit from lower costs.

• This process can continue until the firm locates in an underdeveloped country

Nursery Configuration

* Whenever diversified and specialized cities coexist, diversified cities act as a nursery for firms by facilitating experimentation.

* Specialized cities, on the other hand, provide an environment where firms can take full advantage of lower production costs due to localisation economies.

The Regional Perspective

• Existence of territorial homogeneities within each region.

• Firm entry rates higher in larger municipalities and their metropolitan areas because of the abundance of resources and opportunities

• Metropolitan centers are declining in comparison with smaller municipalities or rural areas.

• This is known as “URBAN-RURAL SHIFT”.

• The origin of these changes seems to be the desire of small firms to avoid the agglomeration diseconomies of larger municipalities (higher land prices, traffic jams, wage premiums, etc.).

• Trade of the trade-off between agglomeration economies and diseconomies.

• The concentration of firms and population in urban areas generates benefits for these agents and attracts more firms and population.

• when this concentration is excessive, previous advantages are transformed into disadvantages that expel firms and population.

• Therefore, in larger urban areas, the centrifugal and centripetal forces have rebalanced in such a way that the centrifugal forces have gained importance at the expense of the centripetal forces.

• This process has occurred inversely in small municipalities with high accessibility to the centers of larger urban areas

Firm Demography and Urban Size: An Application for the Spanish CaseThey have used the

“Ecological Perspective” with the ratio of “Gross Rate

of Entry” because they assume that new firms are

mainly created from existing ones.

Entry rates increase as the size of the municipality

increases until municipalities between

50000 and 100000 inhabitants are met, when entry rates reach a peak

then decrease.

Firm Demography and Urban Size: An Application for the Spanish Case (cont’d…)

Urban areas with over 500000 inhabitants with lower GRE

because of greater barriers to entry resulting from greater

competition in these markets.

Athens was less attractive to new

firms than the rest of the country.

Model and Results

Panel data were used to estimate the determinants of entry according to urban size in Spain from 1994 to

2002 for 140 municipalities.

Model and Results (cont’d…)•Less populated municipalities have a positive and

significant impact on firm entries.

•It is more costly to start up new businesses in large urban areas.

•A greater concentration of the market in a small number of firms restricts entrances in larger municipalities and encourages entrances in

smaller municipalities.

•Impact of unemployment is highest in the smallest and largest municipalities.

Conclusion

• “Urban size” is a key issue in explaining firms’ entry decisions.

• It’s important that territorial factors should be taken into account while analyzing the market dynamics and firm entry decisions.

• The effectiveness of entry policies can be ensured by analysises using more local data.

Critics & Suggestions…• Urban Heterogeneity

• Territorial factors & Spatial policy

• “Urban Size” as a proxy

Critics & Suggestions… (cont’d…)

• What’s the criteria to count the firms entering to the market?

Is “firm size” taken into account?

Literature Review for Firm Entry

Determinants: the Case Turkey

The Dynamics of Entry and Exit in Turkish

Manufacturing Industry (1981-1997)

SEÇİL KAYA and YEŞİM ÜÇDORUK (2002)

Variables Results

Entry rates (dependent)

Profit margin Significant and positive relationship

Concentration ratio Significant and negative relationship

Growth rate of industry Significant and positive relationship

Capital intensity Significant and negative relationship

Firm Behaviors of Entrying the Market in Turkish

Manufacturing Industry (1993-1999)

Burak Günalp and Seyit Mümin Cilasun, (2002)

variables results

Firm entry rates(dependent)

Firm entry rates of previos period

Significant and positive relationship

Profit of industry in previous period

Significant and positive relationship

Industry growth rate Significant and positive relationship

Industrial concentration Significant and negative relationship

Firm exit rates in previos period Insignificant

City Competitiveness Index; An Approach to Measure the

Competitiveness Level of Cities in Turkey

Kerem Alkin, Melih Bulu and Hüseyin Kaya (2007)

City City competitiveness Index value

Population

İstanbul 90,06 12.573.000

Ankara 59,99 4.466.000

İzmir 58,69 3.739.000

Bursa 52,13 2.439.000

Kocaeli 51,41 1.437.000

Kayseri 41,14 1.165.000

Adana 36,72 2.006.000

Gaziantep 36,56 1.560.000

Konya 35,09 1.959.000

Source: TOBB-TUİK

City Competitiveness Index valus

Population

Ağrı 8,43 530.000

Yozgat 8,35 492.000

Bitlis 8,11 327.000

Bingöl 7,45 251.000

Düzce 5,97 323.000

Bayburt 5,82 76.000

Gümüşhane 5,38 130.000

Iğdır 4,91 181.000

Hakkari 4,55 246.000

Ardahan 3,50 112.000Source: TOBB-TUİK

Urban Size Effect to Firm Entry for

Turkey

Firm Entry Rates by Urban Size

Years Group 1 Group 2 Group 3 Group 4 Group 5 Group 6

* (,000) 0- 200 200- 300 300-500 500-1000 1000-2000 More than 2000

2005 (%) 41,6 24,57 12,25 27,92 18,7 14,51

2006 (%) 9,62 4,51 19,89 18,91 1,81 9,53

2007 (%) -13,47 2,62 -8,01 -6,74 -6,74 2,74

mean 12,58 10,56 8,04 13,36 3,71 8,92

Source: TOBB-TUİK