Selection and Evolution of Industry

The evolution of industry depends on the selection mechanism, that is, the process of entry and exit of firms and the various factors influencing the entry and exit decisions. Three major factors are most important in the selection process. One is the evolutionary perspective which emphasizes the firm’s ability and competence to alter their market position and hence through strong increasing returns to scale, to alter the market structure significantly. Following the Schumpeterian theory of technological innovations the main source of such increasing returns is the cumulative aspect of innovations, where “size begets size” causes industrial dynamics to be characterized by nonlinear and path dependent processes, where random events like a new technical process may have lasting and irreversible effects on the dynamic evolution of the selection process. Secondly, firms differ significantly in their commitment and ability to innovate. Thus innovations in products and processes are largely endogenous to the firm through R&D investment and learning-by-doing. Thus vigorous innovation has been found to generate more competitive market structures, while innovations requiring large investment generally involve more concentration through large size firms. Also due to the cumulative nature of technological innovations firms that discover new technologies are able to maintain their lead even after the particular technology is obsolete.