The process of entry and exit of firms is the essence of market competition. In the process of entry and exit, the market resources are redistributed and market performance is accordingly changed. This research is the first empirical study on entry, exit and economic performance at Korean firm level. In this study, authors explore the determinants of firm entry and exit through micro statistical analysis of industry and firm level data. It also contains the statistical inference on the interaction among firm entry, industry specific factors, firm specific factors, and economic performance, and the effect of official entry barrier on economic performance of firms. 

In Korea, firm entry and exit rates annually average 16.03% and 11.75%, respectively over 1988-2001. These entry and exit rates exceed the comparable figures reported for both industrial (United States, Canada, and United Kingdom) and developing countries(Colombia, Chile, and Morocco). Over the sample period, Korean firm entry rates exceed exit rates except a few of years. For the years of 1997 and 1998, the entry rate is smaller than the exit rate due to the financial crisis. The exit rates for new entrants decrease over the year. New firms face a 16% probability of failure in the first year. And then, this declines to 9% in the second  year, 5% in the third and fourth year, and 4% in the fifth year. The exit rate is stabilized after the second year.

The high entry and exit rates, coupled with opening of domestic market, change the domestic market structure from highly concentrated market structure to more competitive market structure. We can classify market structure in three categories, that is, tight oligopolistic industry where HHI is 1,800 or above, a partial oligopolistic industry where HHI is greater than 1,000 and less than 1,800, and rather competitive industry where HHI is less than 1,000.  Over the sample period HHI continuously declines. In 1988, The rather competitive industries account only for 12.37% (24 industries). Whereas in 1999, competitive industries account for 46.02% (81 industries). In 1988, the tight oligopolistic industries account for 61.86% (120 industries), and declines even to 31.82% (56 industries).

The partial oligopolistic industries over the sample period average 20-25% and are stable in numbers and rates.

In the case that economic performance is measured by the ratio of operatin income to sales, incumbent  firms are better than exit firms and exiting firms better than entering firms after control of a variety of factors. The fact that exiting firms outperform entrant firms implies that newly-born firms take current high risk when entering market for high return in the future.

one interesting point in this study is the asymmetry in the effect of entry barrier by law on economic performance between the year of 1992 and the year of 2001. In 1992 before regulatory reform, the firms in effect of official entry regulation outperform the firms not in effect of official entry regulation. The former has enjoyed the economic rent due to entry regulation by law. Of course, there must be inefficiency because theses firms are not fully exposed to market competition. Statistical evidence shows that the rent effect dominates the inefficiency effect in 1992. However, in 2001 after significant regulatory reform,  the firms under official entry regulation are outperformed by the firms not  affected by official entry regulation because the rent effect is dominated by the inefficiency effect. Statistical result implies that the dismantlement of lawful entry barrier raise firms’ economic performance by 10% in the aspect of the ratio of operating income to sales.