- High Startup Costs
- High entry costs increase risk, and reduce the willingness of investors and lenders
are to loan funds. However, even for industries
with equal startup costs, the nature of the startup expenses matters.
- Specialized Capital
- Some industries have high start up costs but for standard equipment which can be used in many industries.
For example, the world wide package delivery business. A
significant part of the startup costs would be a fleet of airplanes
and trucks. If the new business fails these items have considerable
market value in other enterprises. Investors and lenders are more willing take such risks because of the market value of the equipment.
- Now consider auto manufacture. Auto makers require
expensive equipment that is specially built to make a specific
model car. For this sort
of equipment it is impossible to recoup the investment if
the firm fails, making entry more risky and thus more difficult
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