Proceedings

PR – The Determinants Of Entry And Exit Decision In Dutch Glasshouse Horticulture

Entry of new and exit of existing firms are two crucial decisions and they have a special meaning for development of economy and the particular sector or industry. It is a way of introducing new technologies, products and management approaches. The Dutch glasshouse horticulture is a business card of Dutch agriculture due to quick adjustment to new technologies and implementation of many now-how. The unique way of trading of horticulture production through auction system implies a strong competition with horticulture firms not only inside of the Netherlands but also outside. The evolution and adaptation of the sector to such changes are reflected in the process of firm entry and exit. Therefore it is important to examine the firms’ entry and exit decisions. By considering the entry as an investment decision and exit as a disinvestment (negative investment) decision, the findings in investment theory can be applied for explanation of observed changes in population of operating firms. The economic literature on investments and entry-exit decision suggests different possible theoretical models to explain choices of entry, exit and size of firms. This article uses the model developed by Dixit to model the entry and exit decision in Dutch glasshouse horticulture. These decisions can be considered in contents of Real option theory as one of the options of the firm to “act” that has an alternative to “wait”. The recognition of waiting option value is the fundamental concept underpinning the Real Options theory that was developed by Dixit and Pindyck (1994). Any decisions taken now has an opportunity cost, in the sense that it kills off the option of waiting for further information and the possibility of making better decision. In the evolving environment, time brings more information about the future prospects of the project and they should be considered in today’s menu of choices (Dixit and Pindyck, 1994). In his earlier article Dixit (1989) derived exit and entry trigger prices of investments and examined effect of their changes on entry and exit decisions in numerical examples. Developing this idea it is possible to say that output and input prices (and their expectations) are driving the investment decisions in the way that they change cash flow (Dixit, 1992). Changes in prices (and in expected cash flow) can attract firms to the sector or to push them away. In conventional economics firms are induced to enter if current revenue exceeds sunk costs (“Marshallian trigger point”) and to exit if revenue falls below sunk cost. However it is often observed that farmers prefer to wait with entry or exit decision, expecting that prices and revenue can change in the future. In model of Dixit (Dixit, 1989; Dixit, 1992) a wedge between the Marshallian trigger point and “observed” trigger point produces zone of “hysteresis” in which firms do not respond to price signals. Then we can formulate research questions: What are the trigger points for exit and entry firms in horticulture? What is an impact of these trigger points on observed number of firms? What is the dynamic of entry and exit barriers for glasshouse horticulture? Another important issue is the high heterogeneity of entry and exit and absence of clear classification of entry and exit. The different way of entry can affect the entry decision itself and the length of surviving of firm after entry. The different types of exit can indicate about different processes in a sector, which provide a better understanding of reallocation of sources. The goal of this study is to develop empirically applicable classification of entry and exit and to investigate the impact of real option trigger points on number entering and exiting firms for Dutch glasshouse horticulture.

Keywords: Dutch agriculture, waiting option value, Marshallion trigger point.

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Author(s): Goncharova, N., Oskam, A.J.

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Organizations(s): Wageningen University