Exit barriers can prevent companies from leaving an industry, creating a barrier to entry and limiting mobility within the economy. Leaving a market can be costly due to obligations and unique equipment. Companies may create their own barriers to exit, causing problems when market conditions change. Approaches to address barriers include adaptable factories and changing regulations.
Exit barriers are barriers that make it difficult to leave a particular industry, forcing a company to stay in business even if it wants to move to another market or shut down altogether. These represent a barrier to mobility that can limit movement within an economy or market. Exit barriers can also potentially create a barrier to entry, acting as a disincentive to enter a market due to the high costs associated with exit.
The act of leaving a market can be costly; companies may have obligations such as rent and payroll to meet and may not be able to afford closing costs. Additionally, a business may have highly unique equipment and personnel that cannot move into a new market. It may be difficult to sell complex equipment in a limited market where most companies already have what they need and have no particular desire for used specialty equipment from another company. These fixed assets can create a substantial barrier to exit.
Some companies create their own barriers to exit. This could be a strategic move to alert competitors that a company plans to establish and maintain a foothold in an industry and does not intend to leave. When market conditions change or a company wants to change focus, the barriers it has created can cause a problem; a company might be stuck with a special purpose facility it can’t sell, for example.
In an industry with barriers to exit, companies can enter a static state under certain market conditions. Their inability to exit the market can interfere with market adjustments and can make it more difficult to take advantage of changes in the business climate. It can also create a situation where stagnant companies burden a market because they can’t leave, while new companies can face barriers to entry created by those companies. Having a large number of established companies in an industry can make it difficult to break into.
Approaches to address barriers to exit vary. In some regions, companies are working on measures such as adaptable factories and equipment that can be repurposed for other uses. If an auto company decides to stop making a particular model, for example, the cars used in its production may be sold or moved to a different production line. Regulatory limits can also be changed through lobbying and new legislative proposals, to make it easier for companies to transition between sectors and markets.
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