Pakistan Institute of Development Economics



Survival of Newly Founded Businesses: The Post-Entry Performance

A number of studies have been undertaken on industry dynamics or about the process by which new firms either survive and grow, or else exit from the industry. A new literature has emerged in the last few years, which focuses on the question, what happens to new firms subsequent to their entry?, both in terms of their likelihood of survival and their growth patterns. Most of the studies use a theory of organisational ecology by Hannan and Freeman (1989), which emphasises organisational characteristics and environmental conditions; particularly the number of employees and invested capital. In addition, the theory offers a comprehensive set of factors that influence the hazard rate of newly founded business organisations. In particular, this theory deals with the evolutionary process within or between populations of organisations observed over long periods of time [see also Singh and Lumsden (1990)]. Originally, Stinchcombe (1965) directed the attention of organisational theorists, based on a hypothesis of a “liability of newness”, to the age-dependent decline in organisational death rates. A number of studies [Freeman, Carroll, and Hannan (1983)] found that the organisational death risk declines monotonically with age. Later, BrUderl and SchUssler (1990) also empirically tested the Stinchcombe’s “liability of newness” hypothesis and showed that it is not a good representation of the mortality (hazard) of business organisations. Organisational ecologists often discuss the “liability of smallness” in connection with the liability of newness [Aldrich and Auster (1986); Briiderl and SchUssler (1990); Audretsch and Mahmood (1994)]. The assumption is that large new businesses have better survival prospects than small new businesses. Initial size may be measured in terms of either the amount of financial capital or the number employed at the time of founding.

Talat Mahmood