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The Chairman Reviews Academic Work on Evolution of Industries
In an attempt to broaden my knowledge of factors affecting the success and failure of groups of firms, I turned to Pashigian's "Regularities in the Evolution of Industries," chapter 8-2 in his timeless book Price Theory and Applications. A search led me to the related more recent work of Giulio Bottazzi, “Invariances and Diversities in the Evolution of Manufacturing Industries"; Harry Bloch, "The Growth of Firms and the Evolution of Industries”; Martin Kune, "Simulating the Evolution of Industries Using a Dynamic Behavioral Model"; and 1.69 million citations on Google for "evolution, stock markets."
According to Pashigian, industries go through five stages, with total output growth decreasing steadily from 56% to 1% from stage 1 to stage 5; number of new entrants peaking at 5.7 per year in stage 2 when output growth is 35%; and price decreases varying from -13% in stage 1 and stage 2 to -5% in the final stage.
He also indicates that the duration of the stages has been decreasing over time. The Bottazzi data on Italian firms disputes these findings. He and his co-authors found a tent-shaped (inverted “v”) frequency distribution of growth rates of firms in the aggregate. This is an exponential distribution with constant hazard rates, and leads to slightly greater tails than the normal distribution. They found no difference in the growth rates of big and small firms but much variation in the 60 three-digit industries they considered. Being Italian, they are sure to reiterate and find that the distribution of firm size shows a skewed Pareto distribution with say 10% of the firms accounting for 90% of total output (a consequence of random walks). They find that industries show a coexistence of firms with varying sizes with no obvious differences in growth vis-a-vis success. They feel that there may be distinct types of firms based on management style and degree of competition between firms.
The Bloch paper is a series of conjectures and reviews of literature showing co-evolution of strategies and industry developments,, the importance of innovation and competition, the importance of path dependence, and the dynamic nature of the evolution process. Bloch proposes a theory of stages based on: 1. Creative destruction 2. Strategic interaction (struggle) 3. Cooperation (maturity); and 4. A catch-all of trend following or reversion (covering all bases in the best tradition of economists and forecasters).
The Kune paper is the most ambitious of the lot, trying to consider evolution in terms of a feedback process based on managerial decisions based on three types of firms: the cost-cutter, the product innovator, and the niche focus grabber. He concludes based on simulation that depending on different starting points as to market shares, and mixes of the three types of firms can lead to different outcomes. Kune shows that performance is closely related to the strategies adopted by competitive firms and that the greater the number of firms in an industry, the greater "the attrition rate of financial resources to sustain the competitive advantage.”
None of the articles contain predictions as to which firms will be successful in an industry. But some of the techniques employed and categorizations considered suggest fruitful areas for testing on industry data in the US. All the papers emphasize that the path of growth over a number of years, as well as the ensemble of competitive movements in related companies, is an important determinant of future success.