Determinants of entry in the Indian manufacturing sector: 1993-2000

Abstract

Industrial Organisation literature has a long tradition of analyzing determinants of entry in the industrial sector. In most cases the purpose of such analyses has been to identify factors that result in barriers to entry. The conventional literature has thrown'up three broad factors that contribute to the creation of entry barriers: product differentiation, economies of scale and absolute cost advantages. More recent literature has explored these factors further using more sophisticated techniques and methodologies to identify barriers to entry in a more rigorous manner. Just as analysts have explored a variety of factors influencing entry, it has been emphasised that entry is not a homogeneous category and a variety of entry types and modes can be identified. More specifically, a new player in the market has been distinguished from entry into an industry by an existing firm (diversified entry). Similarly it has been argued that entry through an acquisition is qualitatively different from entry through green field investments. It has been suggested that role of various factors in determining different types/modes of entry are likely to be different. Despite the recognition that not all types of entry are the same, hardly any study has explored the determinants of different types of entry. The present study makes an effort to fill this research gap. An exploration of entry barriers is extremely useful in the current Indian context, where significant policy shifts are replacing policy-induced barriers by market based entry deterrents. An understanding of these barriers will facilitate fine-tuning of various policy instruments. The study focuses on new investments; 'entry' through acquisitions, joint ventures with existing firms etc. are not considered. However, new entry is distinguished from diversified entry and several categories are defined within diversified entry. For the period 1993-2000, an attempt is made to explain the variations in the incidence and extent of entry across industry groups within the manufacturing sector. Drawing from the existing literature, the influence of a variety of structural, strategic and performance variables is explored in determining entry. The industry level explanatory factors include concentration ratio, levels of vertical integration, industry size, minimum efficient scale,advertising intensity, sunk costs, export orientation, technology intensity, profitability,growth and risk. Broadly two research questions are explored:

•What are the determinants of entry in the Indian manufacturing sector? •Are the determinants of entry different for different types of entry?

The empirical analysis suggests that: •All types of entry are positively affected by growth in the industry, industry size, and profitability •Product differentiation, vertical integration, scale of operation and industry concentration act as entry barriers for all types of entry • Barriers to entry are more significant for new players than for different types of diversified entry.