The Impact of Location on Firm's Life Duration: The Experiences of New Entrance Firms in the Iranian Textile Industry

اقتصاد و توسعه منطقه ای

Article 5, Volume 24, Issue 13, June 2017, Pages 95-120   

Document Type: Research article

DOI: 10.22067/erd.v24i14.57450

Authors

mohammadali feizpour¹; haniye poushdouzbashi^{* 2}

¹yazd

²yazd university

Abstract

Economic balance and equilibrium along with using different potentials of human resources and natural endowment of each region can be considered as one of the manifestations of sustainable development in each country. Although this topic is relevant to all sectors of the economy, it is becoming more increasingly important in Iran especially in the industrial sector. However, the evidence suggests that, in spite of the entrance of a large number of new firms in this sector, many have already existed in the early years. However, based on the existing studies, among the factors influencing the life duration of economic firms, the firm's location has a great importance. Therefore, this study aims to investigate the impact of location on the life duration of the new entrance firms in the textile industry as one of the largest industries in Iran. The data of this study were obtained from the Iranian Statistics Center and tested by probit regression method. The results indicate a significant effect of location on the life duration of new firms in textile industries in Iran which is in favor of industrialized provinces compared to the others. The differentiation of the impact of the location on the firm's life duration in the group of homogeneous provinces in terms of development or underdevelopment is also visible only in the developed provinces. From the policy viewpoint, these findings assert to the need of paying attention to the location factor in the establishment of the firm at the general level and even among the homogeneous provinces in terms of the level of industrial development according to the type of firm and its activity (especially in the textile industry).

Key words: Firm's location, Life duration, New entrance firms, Textile industry, Iranian manufacturing industries
Introduction
With the onset of the activity of an economic firm, its life can be affected by many factors. The place of the firm, as an unchangeable factor, is an important one. Nevertheless, this subject has been less considered in the economic geography literature of Iran. Therefore, given the importance of the industry sector as the basis of development and textile industry as one of the main industries in Iran, this paper is organized in order to investigate the impact of the location of new entrance firms on the life duration of textile firms.
Theoretical Fundamentals
The industrial economics literature considers the structural determinants of the life duration of an effective firm. Based on the literature in this area, it is assumed that at least the firm size, capital intensity, innovative activities, firm technology, the number of firms in the industry, and the rate of entrance are the indicators of the competition level. While Audretsch (1994) has been the first who focused on the firm's location dimension, the impact of the firm's location on the entrance of firms and the continuation of their activities is an important and undeniable subject which aims to explain the locatinal patterns of entry and the exit of the firms. The place where the firm is located consists of several factors which can be distinguished from other factors such as where the other firms are located which in turn may affect the individual performance of each firm. The theory of regional inbound growth is one of the doctrines of this field which assumes that due to the mobility of capital and labor, the locational differences resulting from technology will disappear in the long run. New geo-economic theories have explained the persistent regional differences. Accordingly, only places with skilled labor have the ability to use technology. Based on the spatial margins to profitability theory, a firm chooses a location where it can maximize its profit. On the other hand, the dynamics in a firm's economic area can change the location of a firm change over time to become a desirable location. In this area, there are also two theories namely inner-city incubator and filtering-down. According to the first theory, the rates of entry in large urban areas are higher due to the external costs from supplier and customer proximity as well as the speed of information flows. The theory of filtering-down in large urban areas also believes that after the evolution of the products and the approach of the firm to the standard level, the firm's natural tendency is to avoid the risky environments and to settle in the suburbs with less complications. Therefore, the performance of firm after entry will always be affected by the size and economic density of the place where they are located. Hence, the existing theories have tried to examine the impact of the location on the firm's performance including the exit (survival).
Data and Methodology
To do this study, the data was collected from a census of workshops of ten employees most of which were from the Iranian Statistics Center with existing constraints (such as the limitation of the study period and the duration of pursuit of firms) to study the life duration of the newly established firms in the textile industry of Iran during the period of 1996-2005. The probit regression model has been used to estimate the influence of factors affecting the life duration of firms. This model has been tested in two stages. In the first stage, the intended provinces are divided into three developed, less developed, and undeveloped groups based on the level of industrial development, and the effects of these three groups have been tested. In the second stage, the effect of location on the life duration of firms in three separate sections is investigated. Besides, among homogeneous provinces each section has been tested in terms of level of development as well.
Also, the firms with smaller size at the beginning of their activity would experience the lower life duration. Making production in a non-optimal size can be considered as one of the reasons for this event. Therefore, according to the findings of this study, it is necessary to determine the industrial location appropriate to each activity from the initial conditions for starting activities in each industry by considering the region of the country. Although, the negligence of this issue will facilitat the firm entry but this increases the probability of firm exit from activity and leads to the loss of resources.
Results
The results of this study indicate that fistly, among the industrial developed provinces, less developed, and underdeveloped industrial regions, the newly established firms that have started their activity in the textile industry and in non-industrialized regions are more likely to survive than other regions. According to the existing literature on this area and the economic conditions of Iran, this is because of some reasons such as the provision of special state facilities to start economic activities in order to establish a relative income balance and to create economic prosperity in these areas, lack of sever competition, relatively cheap human resources, and ultimately favorable conditions for confirming the theoretical foundations of the margin of profitability.
Secondly, there is no significant difference in the life duration of the newly established firms in the textile industry when the impact of location on the life duration of firms between industrialized provinces is investigated.
Thirdly, the comparison of life duration of the newly established firms in the textile industry in the less developed provinces indicates that the firms located in East Azarbayjan survive more than other provinces. Fourthly, among the developed industrial provinces, new textile firms located in Tehran and Markazi have lower life duration, while new textile firms located in Qazvin have more life duration. Fifthly, in all models, in addition to the place impact, other variables affecting the firm's life duration have been also tested in four groups namely firm, employees, expenditures, and industry characteristics. All findings indicate a positive and significant effect of private ownership, labor productivity, technology and advanced education, and the negative and significant impact of the virtual variable on the size of small firms. Therefore, in addition to the impact of the location, new firms in the textile industry with the private sector, higher productivity, and technology enjoys from higher survival probability.

Keywords

Location Life Duration; New Firms; Textile Industry; Manufacturing Industries; Iran

References

[1] Ajdari, Aliasghar & Farsiyan. (2008). Assessment and Analysis of Industrial and Mineral Disposal Plans (2008-2011). Ministry of Industry and Mines, Energy, Industry and Mines (Industry Group). (In persian).

[2] Governorate of East Azarbaijan (2008). Deputy of Planning, Economic, Social and Cultural Report of East Azarbaijan Province. Tabriz. (In persian).

[3] Pakdel Fard, Morteza. (2010). Industrial User and Locate it, Urban Planning Site, http://urbanplanning2.blogfa.com/post-29.aspx.

[4] Derakhshan, Masood. (1995). Econometrics. Volume one, Single Equations With Classical Assumption, samt.

[5] Organization of Industries and Mines. (2010). East Azarbaijan Province, Performance Report of 2010.

[6] Analytical Report on The state of Industry and Industrial Economy in Markazi Province. (2011). Analytical News site of Markazi Province, Article number: 26368, July 14, 2011.

[7] Maleki, Azar. (2008). Ministry of Industry and Mines, Office of Textile and Clothing.

[8] Audretsch, D. & J. Pawan Tamvada (2008). The Distribution of Firm Start-Up Size Across Geographic Space, Economic Geography.

[9] Audretsch, D. & M. Fritsch. (1994). The Geography of Firm Births in Germany. Regiotrol Studies, Vol. 28.4: 359-365.

[10] Buenstorf, G. & C. Guenther. (2007). No place like home? Location Choice and Firm Survival after Forced Relocation in the German Machine Tool Industry. Jena Economic Rresearch Papers (JERP), Issue / Number: 2007-053.

[11] Cefis, E. & O. Marsili. (2005). A Matter of Life and Death: Innovation and Firm Survival. Industrial and Corporate Change, 14(6): 1167-1192.

[12] Fotopoulos G. & H. Louri. (2000). Determinants of Hazard Confronting New Entry: Does Financial Structure Matter?. Review of Industtrial Organization, 17: 285-300.

[13] Fotopoulos, G. & N. Spence. (1999). Spatial Variations in New Manufacturing Plant Openings: Some Empirical Evidence from Greece. Regional Studies, 33(3): 219–229.

[14] Fritsch, M., U. Brixy & O. Falck. (2006). The Effect of Industry, Region and Time on New Business Survival – A Multi-Dimensional Analysis. Review of Industrial Organization, 28:285–306.

[15] Garolfli, G.(1994). New Firm Formation and Regional Development: The Italian Case. Regional Studies, 28(4): 381–393.

[16] Gaygisiz, E. & M. Yaseim Koksal. (2003). Regional Variation In New Firm Formation In Turkey: Cross-Section And Panel Data Evidence. Economic Research Center. Working Papers in Economics.

[17] Gerlach, K. & J. Wagner. (1994). Regional Differences in Small Firm Entry in Manufacturing Industries: Lower Saxony, 1979–1991’. Entrepreneurship and Regional Development, 6: 63–80.

[18] Guesnier, B. (1994). Regional Variations in New Firm Formation In France. Regional Studies, 28(4): 347–358.

[19] Gujarati, (1988). Basic Econometrics. New York: McGraw-Hill International Editions. City University of New York: 491-499.

[20] Hansen, H., J. Rand & F. Trap. (2004). SME Growth and Survival in Vietnam: Did Direct Government Suppurt Matter?. Discussion Papers. Institute of Economics. University of Copenhagen.

[21] Hoogstra, G., J & J. van Dijk. (2004). Explaining Firm Employment Growth: Does Location Matter?. Small Business Economics, 22: 179-192.

[22] Huggins, R., Prokop, D., & P. Thompson. (2017). Entrepreneurship and the determinants of firm survival within regions: human capital. Growth motivation and locational conditions. Entrepreneurship & Regional Development An International Journal, 29 (3-4).

[23] Keeble, D. & S. Walker. (1994). New Firms, Small Firms and Dead Firms: Spatial Patterns and Determinants in the United Kingdom. Regional Studies, 28(4): 411–427.

[24] Loof, H., & Nabavi, P. (2014). Survival, productivity and growth of new ventures across locations. Small Business Economics , 43(2), 477-491.

[25] Louri, H. & V. Anagnostaki. (1995). Entry in Greek Manufacturing Industry: Athens vs. Rest of Greece. Urban Studies, 32(7): 1127–1133.

[26] Mata, J. & P. Portugal. (1994). Life Duration of New Firms. The Journal of Industrial Economics, XLII(3): 227-245.

[27] Nafziger, E. Wayne & Dek Terrell. (1996). Entrepreneurial Human Capital and the Long- Run Survival of firms in India. World Development, 24(4): 689- 696.

[28] Nenonen, T. & H. Littunen. (1998). The Survival of New Firms. School of Business and Economics Center for Economic Research. University of Jyvaskyla Finland.

[29] Santarelli, E. (2000). The Duration of New Firms in banking: an Application of Cox Regression analysis. Emprical Econometrics, 25: 315-325.

[30] Sharif, N., & Huang, C. (2012). Innovation strategy, firm survival and relocation: the case of Hong Kong-owned manufacturing in Guangdong Providence China. Res Policy , 41, 69-78.

[31] Smith, D. M. (1966). A Theoretical Framework for Geographical Studies of Industrial Location. Economic Geography, 42(2): 95-113.

[32] Spilling, O. R. (1996). Regional Variation of New Firm Formation: The Norwegian Case. Entrepreneurship and Regional Development, 8: 217-243.