The Effect of Ecological Factors on Changes in the Number of Individual Firms in an Industry: An Empirical Study

By Lin, Hsing-Fa

This investigation has four major findings: 1) changes in the number of manufacturers in the Leather industry of the EPZ of Taiwan, and the life cycle of the industry have inevitably come to determine whether an outward migration or withdrawal of the industry is necessary; 2) industry ecology factors can effectively explain changes in the number of individual companies involved in the Leather industry in the EPZ of Taiwan; 3) the relationship between industry ecology factors and changes in the number of individuals in the Leather industry of the EPZ of Taiwan display an inverted U- shape, and 4) the influence of industry ecology factors on the number of individuals can be illustrated with a curve of tolerance for industry ecology factors. Finally, implications and suggestions for future research directions are suggested.

I. Introduction

The number of small and medium enterprises (SMEs) in Taiwan is relatively large (accounting for 97.7%of enterprises); thus it is appropriate to apply an ecological perspective. Since its establishment in 1966, the EPZ has been the center of “Taiwan’s major heavy industry in the 60′s” and represented the first move of the island towards industrialization. In terms of ecology, the establishment of Taiwan’s EPZ resembles a newly formed island, and the EPZ is a perfect place for observing the ecology of an industry.

The objectives of this investigation are as follows:

(1) to examine the course of changes in the number of individual companies in the leather industry of the EPZ;

(2) to examine the impact of industry ecology factors on the number of individual companies in the leather industry of the EPZ;

(3) to understand the correlation between the number of individual companies in the leather industry of the EPZ and changes in ecological factors; and

(4) attempts to form a model that explains the correlation between industry ecology factors and the number of individual companies in the leather industry of the EPZ.

II. Literature Review

Ecologists (such as, Hannan and Freeman, 1977) and strategists (for example, Andrews, 1971) claim that environmental factors significantly influence enterprises (Hambrick and D’Aveni, 1988), and moreover that although the environment can provide the resources required by organizations, organizations also must deal with various environmental problems (Hambrick, D’Aveni, 1988; Tushman and Anderson, 1986; Pfeffer and Salancik, 1978; Thompson, 1967).

Accordingly, this investigation uses an ecological perspective to examine the major environmental influences on the number of individual companies in an industry, and to describe the correlation between the number of individuals and industry ecology factors by applying the law of tolerance of ecology factors.

i) External Environment

This investigation stresses the influence of external factors on individual manufacturers. The Economic Processing Zone (EPZ) is a specially regulated economic zone that has no direct connection with social, cultural or demographic changes. Consequently, this investigation only examines the influence of factors such as political and economic turbulence, statutory changes, ecology dynamics, and the economic climate:

Carroll and Delacroix (1982) hypothesize that organization mortality rate decreases with increasing degree of fitness of the economic factors of an organization. Organizational resources increase with the fitness of economic factors (Stinchcombe, 1965). A population network has high integrity enabling the populations therein to maintain a symbiotic relationship (Hawley, 1989). Accordingly, the life chances of an organization increase with the fitness of the economic factors. However, economic factors include various industry ecology factors. The relationship of these factors with the number of individuals in an industry may not be consistent or clear. As a result, this study will analyze each of these economic factors in greater depth. The assumptions of Hl in this work are based on the study of Carroll and Delacroix (1982) on economic factors and economic indicators.

Hl : Different correlations exist between various economic environment factors and the number of individuals in an industry.

ii) Related Studies of Founding of Organizations (Entry)

Population ecologists believe that two forces affect the entry to an environment of organizations:

(1) Ecology dynamics: this describes all of the influences of past entry, deaths, population density, and the number of individuals in the current population. According to ecology dynamics, the past entry and death of individuals has a curvilinear effect on the current entry of new individuals. Population density refers to the number of individuals living in a population (Hannan and Freeman, 1989). Generally, researchers adopt the two models of “current effect” and “delay effect” in examining density dependent factors.

(2) Impact of institutional environment on entry to the environment of organizations: this refers to the influences of the environment when an organization enters an industry and the accessibility of resources.

Hannan and Freeman, (1977) further use labor cost and economic indicators to examine the entry rates of banks and insurance companies. The assumptions of H2 and H3 in this work are based on the study of Hannan and Freeman (1977) on labor cost and economic indicators.

H2: A relationship exists between changes in the wage of the average laborer and changes in the number of individuals in an industry.

H3: A relationship exists between changes in average salary and changes in the number of individuals in an industry.

iii) Related Studies of the Mortality of Organizations (Exit)

Some of the major arguments are that according to the liability of newness proposed by Stinchcombe (1965), new organizations have a higher mortality than existing organizations, and there is a negative relationship between organization operating scale and mortality rate, known as the liability of smallness (Wholey, and Brittain, 1986).

The mortality rate of new organizations rises with population density (Brittain and Freeman, 1980; Carroll and Delacroix, 1982) because of intensified competition among organizations. Also, new organizations have more difficulty in storing and controlling their resources. Delacroix and Solt (1988) verified, in terms of politics (such as election and political turbulence) and economy (such as economic boom or recession, economic index, production index, employed population), the mortality rate of the press industry. The assumptions of H4 and H5 in this investigation are based on the study of Delacroix and Solt (1988) on production index.

H4: A relationship exists between changes in average personal productivity and changes in the number of individuals in an industry.

H5: A relationship exists between changes in average manufacturer productivity and changes in the number of individuals in an industry.

Based on the theories of organizational ecology, this investigation examines concepts of “number of individuals” and “industry ecology factors”. Besides analyzing the correlation between mortality of organizations and environmental factors, this investigation adopts a systematic analogy to compare industry ecology factors with the law of tolerance between relevant organisms and ecology factors. This investigation attempts to verify whether such a law of tolerance also exists in the relationship between an industry and its ecology factors. It further looks into the correlation between different industry ecology factors and the number of individuals in an industry.

Using the statistical data gathered by relevant authorities, a model is deduced from the relationship between different ecology factors and the number of individuals in the Leather industry, in turn helping to establish a model of the law of tolerance. Figure 1 illustrates the research framework and procedures based on an analogy with ecology.

Research procedures: An analysis of the correlation between environmental factors and number of individuals in an industrial population is given at the beginning of this investigation. Those environmental factors that have a significant correlation (p<0.05) with the number of individuals are further classified as industry ecology factors. This investigation also examines whether a reciprocal relationship exists among industry ecology factors. Those industry ecology factors that can explain the number of individuals in an industry (R-square>0.07) better are classified as survival conditions. An analysis of the curve illustrating the relationship between the changes in survival conditions and in industry ecology factors that can give a better explanation to distribution of industries are also known as key environmental factors and the number of individuals is also provided. A conclusion regarding the similarities and dissimilarities between the curves of industry survival conditions and the number of individuals is given at this end of this paper.

III. Research Method

i)Types of data

The data used in this investigation is mainly extracted from the Monthly Statistics published by the EPZ Administration and the Foreign Express Reports \of Economic Statistics published by the MOEA. Most of the data is second-hand, that had previously been compiled.

ii) Research Methods

(1) Point-biserial correlation and quadratic models

Because the data consist of nominal variables, equidistant variables and ratio variables, point-biserial correlation and quadratic models were used in these analyses. This investigation also utilizes SPSS software for the estimation of models.

(2) Limitations

1. Initially only foreign manufacturers were permitted to set up in the EZP, and the products only allowed to be exported, and not sold in Taiwan. Therefore, GNP and GDP had a minimal influence on manufacturer decisions regarding establishing operations there. Furthermore, since 1980 the NTD – USD exchange rate has been stabilized by the government. Therefore, this study does not discuss these three aspects of the economic environment.

Figure 1. Research Framework

2. This work only focuses on the Leather industry in the EPZ. Although the validity of generalizations may thus be limited, the model for industry ecology factors proposed here may set up a foundation for new theories.

iii) Operational definitions

(1) Industrial population

In ecology, a population is defined as all the living organisms of the same species (organization) in a habitat (Starr & Taggart, 1989). Scholars advocating the concepts developed by Hannan and Freeman define the term “organizational population” according to the context of the issues they study. For example, when examining the impact of an institutional environment and basic organization variables on the founding of organizations and mortality rates, “organizational population” is referred to as industry. Moreover, when examining the division of resources, “organizational population” is referred to as “generalists” and “specialists” (Carroll, 1984; Wholey and Brittain, 1986).

The relationship between the number of individuals in an industry and the environment of the industry is the major issue discussed in this investigation. Accordingly, an organization is defined as an industry, and a “population” as the aggregate of individual companies of the same industry established within a specific zone.

(2) Entry (founding) of industry

“Industry entry” is defined as “applications for industry establishment approved by the EPZ Administration and “MOEA” as the “date of entry” identified as the date of approval.

(3) Number of individuals

As relevant administrative authorities do not produce separate figures regarding establishment, entry, mortality and exit rates, but instead only keep records of the numbers of manufacturers approved for registration and deregistration, the term “number of individuals” adopted in this investigation is defined as follows:

Number of individuals = number of manufacturers approved for registration – number of manufacturers approved for deregistration = number of manufacturers operating in an industry

Entry rate of industry = number of manufacturers approved for registration/original number of individuals in an industry

Exit rate of industry = number of manufacturers approved for deregistration/original number of individuals in an industry

In this study, the term “exit from industry” describes situations where the EPZ, MOEA approves applications for deregistration, merger, outwards migration, or suspension of organizations, orders the suspension of an organization, or declares an organization bankrupt. The date of approval of deregistration is taken as the variable for the industry exit date.

(4) Population density

In terms of ecology, population density is defined as the number of living individuals per unit of area. Meanwhile, Hannan and Freeman (1989) defined population density as the number of organizations per each unit of area. The term “population density” used in this investigation describes the number of individual firms per unit of area. The industries within the EPZs (including Kaoshiung EPZ, Nantzu EPZ, Taichung EPZ) are the research subjects of this study. If the EPZs are considered one unit of area (as the institutional environments thereof are completely identical), the “population density” used in this investigation equals “the number of individuals” divided by 1.

(5) Ecology factors

The term “environment” used here is adapted from an ecological perspective, and describes the combination of all of the factors that directly or indirectly affect the survival of individual firms in an industry or an industrial population, and the external environment of that individual or population. Furthermore, “Industry ecology factors” are defined as the environmental factors directly or indirectly affecting the survival, growth, population growth, behavior and distribution of an industry. Among the ecology factors, the conditions crucial for industry survival are known as “survival conditions”.

“Environmental factors” directly connected with the number of individuals are classified as “ecology factors”. On the other hand, the environmental aspects of such ecology factors, which can better explain changes in the number of individual firms (R- square≥0.7), are termed “survival conditions”.

(6) Economic factors

Examining the relationship between environmental factors and number of individuals in an industry, this investigation has, from the review of the literature, concluded there appear to be seven environmental indicators which are also economic factors: (1) economic growth (measured by GDP), (2) exchange rate (New Taiwan Dollar as the base unit), (3) GNP (US Dollar as the base unit), (4) average monthly wage of laborers working in the EPZ, (5) average monthly salary of staff working in the EPZ, (6) manufacturer productivity (annual sales revenue/number of manufacturers in operation), (7) worker productivity (annual sales revenue/number of people employed).

IV. Findings

i. Economic factors

Table 1 lists the correlations between the number of individuals and economic factors.

All economic factors exert a significant influence and have a reciprocal relationship. The correlation significance reaches a notable level of 0.05. H1-H5 thus is proven. This argument has been widely accepted. All these relevant factors can be considered to be ecology factors for the handicraft industry. Further study of the regression curve of number of individuals and industry ecology factors is presented below:

Table 1.

ii) The ecological environment of the industry

(1) Dynamics (density) of number of individuals

Figure 2. Dynamics (Density) of number of individual firms in the Leather industry in the EPZ, The curve of the industry life cycle suggests that the outwards migration of industry to seek new environments is inevitable.

(2) Industry ecology factors

A. Regression curve of average salary vs. number of individuals: f(x) = (number of individuals) = .002(average laborer wage)-7.46E- 08 (average laborer wage)^sup 2^, R-square =.70, F = 37.68. The regression curve reaches a significance level of 0.05. f”(x)<0.

B. f(x) = (number of individuals) = .001 (average employee salary)-2.65E-08 (average employee salary)^sup 2^, R-square = .74, F = 45.87. The regression curve reaches a significance level of 0.05. f”(x)<0.

C. Regression curve of personal productivity vs. number of individuals: f(x) = (number of individuals) = .34 (personal productivity) – .003 (personal productivity)^sup 2^, R-square = .51, F = 17.06. The regression curve reaches a significance level of 0.05. f”(x)<0.

D. Regression curve of manufacturer productivity vs. number of individuals: f(x) = (number of individuals) = .01 (manufacturer productivity) – 1.83E-08 (manufacturer productivity)^sup 2^, R- square = .40, F = 10.94. The regression curve reaches a significance level of 0.05. f”(x)<0.

From Figs. 3, 4, 5 and 6, the relationship between the number of individuals in the Leather industry, and industry ecology factors displays an inverted U-shape. Moreover, the actual number of individual companies did not begin and end with zero. Therefore, this investigation submits the following hypothesis about the curve of tolerance: that the relationship between industry ecology factors and changes in the number of individuals shows an inverted U-shape.

Figure 2. Dynamics (Density) of number of individuals employed in the Leather industry in the EPZ

Figure 3. Regression curve of average laborer wage vs. number of individuals

Figure 4. Regression curve of average employee’s salary vs. number of individuals

Figure 5. Regression curve of personal productivity vs. number of individuals

2. Curve of tolerance

An industry is subject to both the minimum and maximum limits created by industry ecology factors. That is, an industry has both an upper limit and a lower limit of tolerance for each of its ecology factors. The zone between the upper and lower limits represents the scope of tolerance of that industry for its ecology factors, which covers the optimum survival zone. Moreover, individual firms cannot survive in the zone of intolerance. A curve of tolerance is displayed below to describe the relationship between ecology factors and number of individuals by comparing similar concepts to Shelford’s law in ecology:

The EPZ of Taiwan was established primarily to attract foreign manufacturers. The gradient of those environmental factors that can be manipulated is adjusted to the optimum zone for survival (the thick line in Fig. 7). Accordingly, the line segment of the lower zone of stress is not shown. When the survival conditions of manufacturers are on the verge of the upper zone of stress, there is no way to prevent manufacturers to exit. Similarly, the line segment of the upper zone of stress is also not shown.

The curve of tolerance is different from the life cycle. The independent variables of the former are environmental factors. However, the independent variable of the latter is time. Furthermore, different industries have different industry ecolog\y. Probably, ecology factors are a key which can explain the distribution and migration of industries as well.

V. Conclusion

From an ecology perspective, this investigation examines environmental factors influencing the number of individual firms in the leather industry in the EPZ, and the relationship between ecology factors and the number of individual firms in the industry. The major findings are summarized below:

Figure 6. Regression curve of manufacturer productivity vs. number of individuals

1. The Leather industry in the EPZ of Taiwan displays an inevitable trend of migrating (exiting), as indicated by the changes in number of individual firms and the life cycle of that industry;

2. Ecology factors can explain changes in the number of individual firms in the leather industry in the EPZ of Taiwan;

3. The relationship between industry ecology factors and changes in the number of individuals of Leather industry in the EPZ of Taiwan has an inverted U-shape;

4. The impact of ecology factors on the number of individual firms can be illustrated by the curve of tolerance of such factors.

VI. Theoretical Implications

i. The law of tolerance gives rise to the concept of survival conditions or limiting factors. Survival conditions are the key to understanding the complex relationship between industry and environment because of variation in the degree of significance of different ecology factors. The identification of limiting factors simultaneously means the identification of the key ecological factors for industry survival and development. These factors can then become the focus of future study.

ii. A study on how individual and environmental factors are related can reduce the difficulty and complexity of research. Those survival conditions which can provides a better interpretation of survival can then be found, as long as the focus is on the external environmental factors or even economic factors. Those survival conditions are very helpful in developing principles of industrial ecology.

Figure 7. Curve of tolerance

iii. No data on industrial individual long-term intrinsic environment or understanding of the distinctions between industrial individuals is required for studying the relationship between number of individuals and environmental factors. This fact greatly reduces the cost of research and the time required in terms of economy, efficiency and accessibility.

VII. References

Brittain, J., & J. Freeman, 1980, ” Organizational proliferation and density-dependent selection “, In J. Kimberly and R. Miles (Eds), organizational life cycles, pp.291-338, San Francisco: Jossey- Bass.

Carroll, G. R. , and J. Delacroix, 1982,”Organizational Mortality in the Newspaper Industries of Argentina and Ireland”, Administrative Science Quarterly, 27, 169-198.

Carroll. G. R., 1984. “Organizational Ecology”, Annual Review of Sociology, 10, 71-93.

Delacroix, J., and M. E. Solt, 1988, “Niche Formation and Founding in the California Wine Industry”, G. Carrol], eds, Ecological Models of Organizations. MA: Ballinger.53-70.

Hambrick, D. C. and R. A. D’Aveni, 1988, “Large Corporate Failures As Downward Spirals”, Administrative Science Quarterly, 33, 1-23.

Hannan, M. T. and J. Freeman, 1989, Organizational Ecology, Cambridge, and Massachusetts: Harvard University Press.

Hannan, M. T. , and J. Freeman, 1977, “The Population Ecology of Organizations”, American Journal of Sociology, 82, 929-964.

Hawley, A. , 1989, “Cumulative Change in Theory and in History”, American Sociological Review, 43, 787-96.

Pfeffer, J. M., and G. R. Salancik, 1978, the External Control of Organizations: A Resource Dependence Perspective, New York: Harper & Row.

Stinchcombe, A. L, 1965,”Social Structure and Organizations”, March, eds, Handbook of Organizations. Chicago: Rand McNally.

Starr, C. and R. Taggart, Biology: The Unity and Diversity of Life 5/e, Published by Thomson International Publishing, (1989)

Thompson, J. D., 1967. Organizations in Action, New York: McGraw- Hill.

Tushman, M. L. , and P. Anderson, 1986, “Technological Discontinues and Organizational Environments”, Administrative Science Quarterly, 31, 439-465.

Wholey, D.R. and J. W. Brittain, 1986, “Organizational Ecology: Findings and Implications”, Academy of Management Review, 11(3), 513- 533.

Hsing-Fa Lin

National Taipei University, Taiwan

Hsing-Fa Lin

Graduate School of Business Administration

National Taipei University

64 Alley 10, Lane 124, Pei Yuan St

Tainan, Taiwan 704

Copyright International Journal of Management Sep 2005