Effects of Entry Deterrent Strategies on Size Distribution of Firms in the Indian Manufacturing

The paper intends to study the relationship between firm size and growth, effects of entry-deterrent-strategies (EDS) on firms’ size distribution (FSD) and determining factors of inequality of firm sizes. One approach is the ‘Law of Proportionate Effect’ (LPE) hypothesis by Gibrat (1931), implicitly suggests that increasing concentration and resulting lognormal distribution are due purely to random process. Another approach we propose is due to systematic processes whereby strategic entry deterrents such as advertising expenditure, intangibles, R & D expenditure and excess capacity are expected to have positive impact on inequality of firm sizes. In practice, though the prevalence of lognormal distributions of firm size indicates that there are stochastic forces at work, such stochastic processes operate along with more systematic influences on concentration. Hence, we propose to study systematic effects such as entry deterrent strategies may be seen as either accelerating or decelerating the stochastic process and it is to these systematic influences on inequality of firm size that we direct our analysis on in this paper. The empirical analysis of the present study is for 8 sectors over 1990-2007 using CMIE-PROWESS data base. We model inequality as a function of EDS and other control variables referring to Bloch (1981) and estimated results show strong and statistically significant relationship between inequality of firm size and EDS. Intangibles, R&D expenditure, excess capacity and mean firm size are statistically significant and inequality increasing. Number of firms operating and export openness are statistically significant and inequality decreasing. We presume that the analysis has some use to concerned competition policies