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Edited by Manfred Neumann and Jürgen Weigand
Chapter 3: Small Firms, Innovation and Competition
89 ﬂourish or be pursued within the context of incumbent ﬁrms are sometimes pursued by the start-up of a new ﬁrm. The start-up of a new ﬁrm can represent the attempt to commercialize an untried idea. As Jovanovic (1982) argues in his model of noisy selection, new ﬁrms do not know the viability of their enterprises but only discover this subsequent to start-up, struggling in the market and striving for performance. Start-ups, learning from market experience that their product is viable, grow and ultimately survive; those learning that their products are not viable stagnate and exit. Thus an important source of market competition in this dynamic context comes from the new products and processes being introduced in the market by new ﬁrms. The dynamic contribution to competition emanating from new and small ﬁrms suggests that policies mitigating barriers to start-up of new ﬁrms as well as barriers to entry by incumbent ﬁrms should be an equally important component of competition policies. By encouraging the entry of new ﬁrms, policy can generate new competition in the form of a greater number of ﬁrms experimenting with a greater variety of approaches. Increased variety generates greater competition which, through a process of selection, results in many ﬁrms exiting and fewer surviving by providing the best novel approaches (Cohen and Klepper, 1992; Audretsch and Thurik, 2001). Policymakers have recently recognized the potential contribution to dynamic competition that new ﬁrms can play. This has led to a shift in emphasis towards reducing barriers to start-up....
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