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Bariers To Exit

Barriers to exit

What is the process of exit from an industry? Is it efficient or inefficient? Classics on investment behaviour, such as Salter (1966) and Nickell (1978) and introductory economics text suggest that the exit process works well and that the least efficient plants close first. There are many examinations made which proves that non-optimal exit behaviour may occur, stressing the problems arising from game playing between competitors and game playing between firms and governments. Six major exit barriers are identified from the literature review, based on Porter's classification of the barriers as economic, strategic and managerial. The effects of these six barriers(cost of divestment, operating fit, marketing fit, forward vertical integration, backward vertical integration and number of years of association of the businesses unit with the firm) on the decision to exit from markets are tested by using a decision-making exercise. The results indicate that executives consider forward and backward vertical integration to be the most important barriers to exit, followed by the number of years the unit is with firm, was found significant only for the maturity stage of the product life cycle. As expected the regression coefficients were showing an inverse relationship between the presence of the barriers and decisions to divest.
As the name implies, exit barriers make it difficult for firms to leave the declining market, so their presence is likely to lead to firms fighting to maintain their positions for as possible. First we could discuss the extent to which production relies upon durable or specialized assets- if assets are highly specialized (i.e. they have no alternative use) this will mean that they have negligible liquidation value because nobody will want to buy into the declining market. As a result, if the firm keeps the assets working it might be able to earn a stream of returns that exceeds the price they would fetch if they...

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