Product Customization and Firm Survival

This research investigates the impact of product customization activity on firm survival. Using unique data on laser and 12 related industries between 1997 and 2009, I examine whether, as the submarkets model of industry evolution suggests, firms that undertake product customization activity survive longer. The findings show that, while product customization does enhance firm survival, it does so through two distinct channels. First, as the submarkets model captures, product customization leads to better survival through developing new submarkets, which I call the pioneering effect. Second, product customization intensity at the submarket-level has a deterrent effect on entry, which is associated with an additional survival premium not captured in the submarkets model. The results are robust to alternative explanations such as survival premium from multimarket contact and mutual forbearance. According to one interpretation of the results greater exploratory search for submarkets by firms already present in the industry lowers subsequent entry into the industry. While prior research has modeled the within-firm tradeoff between exploration and exploitation, the results suggest that important industry- level dynamic, indirect effects may have been neglected. According to another interpretation of the results, such dynamic effects lower conformist and imitative entry.

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