Intra-industry firm heterogeneity, sub-optimal adaptation and exit hazard: a fitness landscape approach to firm survival and learning

Eshref Trushin and Mehmet Ugur ()

Economics of Innovation and New Technology, 2021, vol. 30, issue 5, 494-515

Abstract: We draw on insights from the fitness landscape literature and from models of firm dynamics with learning to hypothesise that: (i) firms in industries with higher company age or size heterogeneity have higher exit hazard after controlling for age, size, and a variety of other predictors of firm survival; and (ii) higher levels of R&D investment mitigate the hazard-increasing effects of industry firm heterogeneity after controlling for the direct effects of R&D intensities at industry and firm level. We test for these novel sources of selection with evidence from a panel dataset of 35,136 R&D-active UK firms from 1998 to 2012 and a range of discrete-time hazard estimators. The findings, which remain robust to multiple sensitivity checks, offer two novel contributions to the literature: (i) firm heterogeneity is not just a passive precondition for subsequent selection process in industry evolution; this heterogeneity enhances selection as more firms might be stranded in suboptimal positions; (ii) firms in more heterogenous industries can mitigate the hazard-increasing effects through R&D investment that facilitates adaptation and search for better fitness locations.

Date: 2021
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Working Paper: Intra-industry firm heterogeneity, sub-optimal adaptation and exit hazard: a fitness landscape approach to firm survival and learning (2020)
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DOI: 10.1080/10438599.2020.1766655

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