The propensity to exit and innovation

In offering an answer to the question, “Who exits and why?”, I introduce a model relating the decision to remain in, or exit from an industry, to conditions of demand and the underlying technology. In particular, I argue that two elements of technology are important — the role of scale economies in an industry and the extent to which the underlying technological information conditions can be characterized by either an entrepreneurial or a routinized regime. Based on the evidence from over 300 U.S. manufacturing industries, I conclude that the process of firm selection and industry evolution tends to conform either to the model of the revolving door, where the bulk of exiting businesses are new entrants, or else the metaphor of the forest, where incumbent establishments tend to be displaced by new entrants.