INDUSTRY ENVIRONMENTS AND NEW VENTURE FORMATIONS IN US MANUFACTURING - A CONCEPTUAL AND EMPIRICAL-ANALYSIS OF DEMAND DETERMINANTS

Through integration of theoretical perspectives from Austrian economic s, industrial organization economics, and organizational theory, this study builds and examines empirically a model of the demand determinan ts of new venture formations in manufacturing industries. Austrian eco nomics and other writings on market disequilibrium imply that the dyna mics of industries create market opportunities that are available to e conomic actors. The greater the changes occurring in an industry, the greater the opportunities created, and the further the market is moved from an equilibrium state. Entrepreneurship is viewed as the process of seizing opportunities through combinations of productive inputs. Th e more available market opportunities in an industry, the greater is t he potential for entrepreneurial activity and, more specifically, new venture formations. Entry barriers constrain the formation of new vent ures by prohibiting new ventures from taking advantage of available em erging opportunities. The inertial properties of existing firms constr ain their ability to move toward these opportunities and thereby incre ase the potential for new ventures to exploit these market opportuniti es. The empirical analysis utilizes the Small Business Administration' s U.S. Establishment and Enterprise Microdata file to test the model o n a large sample of U.S. manufacturing industries. Results indicate th at dynamic industries have greater new venture formations. More specif ically, new venture formations are associated with industry growth, th e dynamism of industry niches, and technological development. Moreover , entry barriers were found to strongly constrain rates of new venture formations. Industry capital requirements, concentration, and excess capacity were all related negatively to the formation of new ventures. The hypothesized positive relationship between industry-level measure s of organizational inertia and new venture formations was also bore o ut in the empirical analysis. New venture formations were related posi tively to the extent of vertical integration in an industry as well as to the failure of incumbent firms to invest in new capital. Overall, the independent variables explained more than 50% of the variance in r ates of new venture formations in manufacturing industries. The result s support an Austrian perspective on entrepreneurship and imply that d emand factors and industry structural variables are important determin ants of new venture creations. The results imply that dynamic industri es should spawn new ventures, and industries with high sales growth, c hanging consumer preferences, and rapid technological change should ex hibit high rates of venture formations. For potential entrepreneurs, t he model presented herein might be a useful guide to focus their ventu re activities. Entrepreneurs who can spot the fundamental sources of m arket change can exploit their knowledge for economic gain. Yet, there are a number of difficulties in suggesting that the model presented h erein could be directly applied by entrepreneurs. First, it is always easier to estimate the dynamics of an industry post hoc than it is ex ante. For example, whereas it is simple to catalogue the technological change that occurred in an industry over time, it is another matter t o predict the nature of future technological developments. Second, ent repreneurial opportunity can persist only if other potential economic actors do not know of the presence of the opportunity or cannot act up on it. Any model that gains acceptance as a means of predicting the pr esence of opportunities would, through its widespread usage, neutraliz e those opportunities for economic profit. Nonetheless, entrepreneurs who have that unique capability to spot industry dynamics and associat ed profit opportunities where others do not will gain from that abilit y.