The role of investment efficiency in the industry life cycle

This article studies a dynamic model of an industry life cycle based on increasing returns in the cost of growth whereby large firms can grow more easily. When there are strong increasing returns in the adjustment cost function, the model exhibits multiple rest points, and firms do not necessarily all end up in the same state. The model generates typical life cycle stages including a shakeout. The likelihood of survival is positively correlated with the entering size, an implication that fits empirical findings that exiting firms are small not only just prior to exit but also at the time of entry. The model also explains newer findings on the evolution of moments, an increase in the skewness and the spread of firm-size distribution before the shakeout and a decline in these with the start of the shakeout. Copyright 2010 The Author 2009. Published by Oxford University Press on behalf of Associazione ICC. All rights reserved., Oxford University Press.