Barriers to exit
|Barriers to exit|
Barriers to Exit, according to Porter (1976), are “adverse structural, strategic and managerial factors that keep firms in business even when they earn low or negative returns”. This type of barrier is a process adopted by economies that intend to prohibit companies from leaving their country, in order for them only create value internally. Thus, if a company has low levels of profitability, its competitive capacity decreases, contributing to a less efficient market (OECD 2019). Furthermore, this type of barrier obstructs economic growth, as supply will react slowly to market changes, leading to high price volatility. Nowadays, governments can implement different types of barriers to firms’ exit from markets, namely economic, strategic, managerial and political barriers (Porter 1976).
With regard to economic barriers, these comprise specific assets and sunk costs.
- When a company holds resources that can only be applied to the industry where it operates, if it wants to leave the market where it sells its products/services, it will have to incur costs associated with the specific assets it holds, since these cannot be transported to other markets.
- In addition, a company, during its operationalization, incurs specific investments in the market where it operates, that will be considered sunk costs, since, if it intends to leave that same market, it will not be able to recover the invested capital (OECD 2019).
Consequently, a company can position itself in a complicated situation, since it can be “forced” to remain in the market, even if it obtains lower operating profits than it would in another market.
Regarding strategic barriers, it perform similarly to entry barriers.
- Shapiro and Khemani (1987) found that if there is a leading company in the market in a given industry, it will discourage other companies from leaving the industry in which it operate to try to enter that market.
- It should be added that one of the main factors that discourage firms to operate in a given market is the fact that these markets have high exit barriers, since the actual performance may not match what was expected, making it difficult for it to leave the market.
Managerial barriers are directly related to the incentives of company managers not to leave the market where they operate. In the first instance, it is expected that when a company creates a great connection with the country where it operates, there is a lower probability of leaving this market (Gilmore 1973), since it intends to maintain and develop the relationships established with its customers, gain greater notoriety in the market and contribute to the country’s economy. Furthermore, this type of exit barriers arises due to the existence of incompatibility between the values defended and the objectives outlined by the CEO’s and the directors of the various departments of the company.
Another type of barriers are political barriers. These are related to the fact that companies must first analyze the characteristics of the political system of the country to which it intend to internationalize and all the advantages and disadvantages of entering that new market. If, by any chance, the laws and regulations instituted by the destination country do not coincide with the values defended by the company, it will not feel encouraged to leave the market where it operates (Langlois-Bertranda et al 2015).
Barriers to exit conclusion
In conclusion, markets that implement barriers to exit are characterized by not promoting innovation and efficient operation of their firms. Consequently, they prevent firms from achieving the desired economic growth that it could obtain in other markets that do not present these types of barriers.
Examples of Barriers to exit
- Government Regulations: Government regulations are one of the most common barriers to exit. These regulations can be imposed on a national, regional or local level, and can include taxes, tariffs, quotas, and other forms of trade protectionism. These regulations can act to prevent firms from leaving a certain country, thereby giving them an advantage over those who are not subject to the same restrictions.
- High Capital Requirements: Establishing and running a business requires a significant amount of capital. This capital can be in the form of cash, debt, or equity, and is necessary in order to finance the start-up costs and day-to-day operations of a business. High capital requirements can act as a barrier to entry by making it difficult for businesses to obtain the necessary funds to get started or to maintain operations, thus preventing them from exiting the market.
- Cost of Relocation: Moving a business from one location to another can be costly and time-consuming. This cost can be in the form of financial expenditures such as renting or purchasing new facilities, as well as other costs such as the cost of labour, equipment, and advertising. All of these costs can be a deterrent to firms who are considering exiting the market by relocating.
- Industry Practices and Relationships: An industry’s practices and relationships, such as supplier contracts, can also act as a barrier to exit. This is because certain suppliers may be reluctant to continue working with a firm if it moves to another location. Additionally, certain industry practices may be difficult to transfer to a new location, thus making it difficult for firms to continue operations in their new location.
- Legal Constraints: Legal constraints, such as certain laws or regulations, can also act as a barrier to exit. For example, certain laws may require firms to obtain certain permits or licenses in order to operate in a certain area. Obtaining these permits or licenses can be time-consuming and costly, thus making it difficult for firms to exit the market.
Advantages of Barriers to exit
One of the advantages of barriers to exit is that it enables more stable economies. These barriers can help protect local economies from large fluctuations in the market by limiting the entry and exit of firms. Additionally, barriers to exit can help to protect existing businesses from competition and to maintain their profitability. This can help to provide stability and security to businesses, which can be beneficial for local economies. Furthermore, barriers to exit can provide incentives to firms that are considering investing in the country, as they can be confident that they will not be easily replaced. Lastly, barriers to exit can also provide protection for employees, as firms cannot easily exit the market and lay off their workers. *It can also encourage firms to invest in their employees, as they know that they will not be able to easily exit the market and find new workers in another country.*
Limitations of Barriers to exit
One of the main limitations of barriers to exit is the potential for market stagnation.
- Firstly, when companies are restricted from leaving the market it can lead to a situation where firms are unable to respond to dynamic changes, thus resulting in a decrease of market competition and the emergence of an oligopolistic atmosphere.
- Secondly, such barriers may limit the economic growth of a country, as the lack of competition can lead to reduced investment, decreased innovation and higher prices.
- Thirdly, the introduction of such measures can lead to unethical business practices, as firms may take advantage of the lack of competition and become more aggressive in their pricing and marketing strategies.
- Finally, barriers to exit can lead to a situation of market inefficiency, as the lack of competition may lead to a decrease in the quality of products and services.
Barriers to Exit, according to Porter (1976), are “adverse structural, strategic and managerial factors that keep firms in business even when they earn low or negative returns”. Other approaches related to Barriers to Exit include:
- Economies of Scale: This is when the cost of production decreases with increasing output. It arises when companies increase their production capacity, leading to a decrease in cost per unit of production. This raises the risk of potential competitors entering the market.
- Cost of Exit: This refers to the costs associated with a company leaving the market. These costs can include the potential loss of customers, the cost of selling off assets, and the cost of closure.
- Government Regulation: Government regulations can create barriers to entry or exit by imposing restrictions on firms. These regulations can include taxes, tariffs, or subsidies that make it difficult for companies to enter or exit the market.
In summary, Barriers to Exit are factors that make it difficult for a company to leave a market, even when it is unprofitable. These barriers can include economies of scale, cost of exit, and government regulations.
- Gilmour, S. C. (1973). The divestment decision process. Harvard University.
- Langlois-Bertranda, S., Benhaddadi, M., Jegen, M., & Pineaud, P-O. (2015). Political-institutional barriers to energy efficiency. Energy Strategy Reviews, 8.
- OECD. (2019). Barriers to Exit – Background Note
- Porter, M. E. (1976). Please note location of nearest exit: exit barriers and planning. Calif Manage Review
- Shapiro, D., & Khemani, R.S. (1987). The determinants of entry and exit reconsidered. International Journal of Industrial Organization, 5(1).
Author: Ana Inês Jorge Gonçalves, Inês Espregueira Guerra Teixeira de Morais, Marta Gomes Ribeiro