Entry Business Environment, Entry Barriers and Long-Run Firm Survival

【Authors】

ZHU Yimeng & XU Xianxiang

【WorkUnit】

ZHU Yimeng（Foshan University, 528225）；XU Xianxiang（Sun Yat-sen University, 510275）

【Abstract】

Since the business environment has improved in China, there has been a structural change in the survival time of entrants as the entry barrier lowers. While more new firms exit shortly after entry, which is consistent with existing literature, the share of firms surviving long-term has also increased significantly. This counterintuitive finding raises critical questions about how lower entry barriers affect long-run firm survival—a topic of great importance for stabilizing China’s economic growth.
Based on the theory of firm dynamics, this study examines the abolition of entry approvals as a reduction in entry cost. The “market selection” view and “firm selection” view provide two possible paths of long-run effect with opposite results. Empirical findings support the former. Entry approvals abolished at the establishment of firms increase the long-run survival possibility. Further, the long-run impact of the entry business environment on firm survival mainly comes from the abolition of production licenses. The impact reinforces as firms age. This positive effect is more pronounced when firms enter during economic recessions or when local administrative approval service centers are absent. Finally, this study finds that both the initial productivity of entrants and the equilibrium productivity of market turnover increase after the abolition of entry approvals, with persistent productivity advantages. These findings coincide with the theoretical mechanism of “market selection”.
The possible marginal contributions of this study are as follows. First, it shifts the focus of the evaluation of factors influencing firm survival and the economic performance of administrative approval reform from short-run to long-run effects, while previous studies mostly focused on the current or short-run effects of the administrative approval reform, with little attention to the long-run effects. To overcome challenges of building a suitable measurement and identification strategy when exploring the long-run effects, this study precisely measures the entry business environment based on the analysis of policy texts, which clearly distinguishes from regulations governing other stages in a firm’s lifecycle. Meanwhile, by introducing the APC model into standard survival analysis, this study solves the problem of identifying long-run effects. Second, the study expands the focus of administrative approval reform from the regional level to the industrial level. Existing literature mainly discusses the establishment of administrative approval service centers at the regional level, with little attention to the abolition of approvals at the industrial level. This paper helps to understand the policy change more comprehensively. Third, unlike previous studies which primarily focused on the entry economic environment, such as business cycle and credit condition, in attempts to identify deep-rooted factors for long-run economic growth, this study focuses on the entry business environment and expands the study of firm dynamics from the economic perspective to the institutional perspective.

JEL: D22, M13, O25

【KeyWords】

Entry Business Environment, Entry Approvals, Firm Survival, Firm Dynamics