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).

Economic barriers

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.

Strategic barriers

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

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.

Political barriers

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.

References

• 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