Flexible production and entry: institutional, technological, and organizational determinants

Sharon Belenzon, Victor Bennett, Andrea Patacconi

Research output: Contribution to journalArticle

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Abstract

Academics, the media, and policymakers have all raised concerns about the implications of human workers being replaced by machines or software. Few have discussed the implications of the reverse: firms’ ability to replace capital with workers. We show that this flexibility can help new firms overcome uncertainty and increase entrepreneurial entry. We develop a simple real options model where permissive labor regulations allow firms to take advantage of capital-labor substitutability by replacing ‘rigid’ capital with ‘flexible’ labor. The model highlights institutional, technological, and organizational preconditions to using this flexibility. Using a large and comprehensive dataset on entry by standalone firms and group affiliates, we provide evidence in support of the model.
Original languageEnglish
Pages (from-to)193-216
Number of pages24
JournalStrategy Science
Volume4
Issue number3
Early online date19 Jul 2019
DOIs
Publication statusPublished - Sep 2019

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