The capabilities of new firms and the evolution of the US automobile industry

Abstract

Firms that diversify into new and existing industries typically outperform de novo entrants, but in some new industries diversifying firms are displaced by later‐entering de novo firms. Little is known about when and how new firms can overcome the advantages of diversifying firms. This is investigated for one industry, automobiles, where new firms had considerable success. All the entrants into the industry from its inception in 1895 through 1966 are identified. The heritage of every entrant into the industry is traced, including the founders of de novo entrants, to explore how time of entry and pre‐entry experience affected firm survival. While diversifying firms on average outperformed de novo entrants, de novo entrants founded by individuals that worked for the leading automobile firms outperformed all firms and dominated the industry. This is attributed to the novel organizational challenges faced by automobile firms, which made the leading firms ideal training grounds for new entrants. The implications of these findings for firm capabilities, industry competition and regional economic development are discussed.