AN URBAN APPROACH TO FIRM ENTRY: THE EFFECT OF URBAN SIZEby Arauzo and Teruel

Aykut AYMELEK Elif TOPU Nee UYANIK Seluk SAKARYA

OUTLINEIntroductionThe effects of the Territorial Factors to Firm DemographyFirm Creation and Urban EnvironmentSpanish CaseModel and ResultsCritics and SuggestionsTurkish Case

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

The authors consider that size is an important determinant of a citys 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 typologiescharacteristics of the municipalitythe local labor markets as territorial areasthe percentage of the states 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 PerspectiveExistence 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 (contd)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 ResultsPanel 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 (contd)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.

ConclusionUrban size is a key issue in explaining firms entry decisions.

Its 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 & SuggestionsUrban Heterogeneity

Territorial factors & Spatial policy

Urban Size as a proxy

Critics & Suggestions (contd)Whats 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)SEL KAYA and YEM DORUK (2002)

Firm Behaviors of Entrying the Market in Turkish Manufacturing Industry (1993-1999)Burak Gnalp and Seyit Mmin Cilasun, (2002)

City Competitiveness Index; An Approach to Measure the Competitiveness Level of Cities in TurkeyKerem Alkin, Melih Bulu and Hseyin Kaya (2007)

Source: TOBB-TUK

Source: TOBB-TUK

Urban Size Effect to Firm Entry for Turkey

Firm Entry Rates by Urban SizeSource: TOBB-TUK