Gmat

The general density dependence model can be applied to explain the founding of specialist firms (those attempting to serve a narrow target market). According to this model, specialist foundings hinge on the interplay between legitimation and competitive forces, both of which are functions of the density (total number) of firms in a particular specialist population. Legitimation occurs as a new type of firm moves from being viewed as unfamiliar to being viewed as a natural way to organize. At low density levels, each founding increases legitimation, reducing barriers to entry and easing subsequent foundings. Competition occurs because the resources that firms seek--customers, suppliers, and employees--are limited, but as long as density is low relative to plentiful resources, the addition of another firm has a negligible impact on the intensity of competition. At high density levels, however, competitive effects outweigh legitimation effects, discouraging foundings. The more numerous the competitors, the fiercer the competition will be and the smaller will be the incentive for new firms to enter the field.

While several studies have found a significant correspondence between the density dependence model and actual patterns of foundings, other studies have found patterns not consistent with the model. A possible explanation for this inconsistency is that legitimation and competitive forces transcend national boundaries, while studies typically restrict their analysis to the national level. Thus a national-level analysis can understate the true legitimation and competitive forces as well as the number of foundings in an industry that is internationally integrated. Many industries are or are becoming international, and since media and information easily cross national borders, so should legitimation and its effects on overseas foundings. For example, if a type of firm becomes established in the United States, that information transcends borders, reduces...