© 2000 John Petroff
|
|
© 2000 John Petroff |
These are industries of products that would be in the introduction or expansion phases of the product life cycle (described in Section B-2 of this chapter). Two characteristics can be brought back into focus from the earlier discussion: need to attract new clients to a novelty, and major difficulties encountered in attracting fund. At first sight, a growth industry should not be cyclical because a new product must have superior quality that no other product has; customers ought to need it even during a recession because it was not available before. Moreover, innovation seekers (described in Section B of this chapter) are not concerned with price nor with their income. Yet, statistics tend to show that timing of a new product introduction and business starts are linked to business cycles. Graph G-14.11 shows a very clear correlation between rate of change in new business formations and rate of growth of personal consumption expenditure.
However, as for the second characteristic of fimrs introducing new products, i.e. financing insufficiency, the fact that more businesses are started at business cycle peaks seems also to go against intuition. It is in periods of economic expansion that financing is most expensive. In addition, since the stock market leads the business cycle, that means that investors foresee a forthcoming slow-down; and the onset of a bear market causes stock prices to dive, new initial public offering to be more difficult to float, and venture capital to dwindle. (This is only true if there is a perception that the peak is approaching. But not, if the expansion is extended over a long period of time, as it has been in the late 1990's. Then the sales expectations clearly justify product introduction during periods of long economic expansion.)
Naturally, it is difficult to know with precision when the economy is peaking. Often the peak has passed before most businesses realize it. Introducing a product or starting a company also takes as much as one year. So, it is likely that some introduction initially planned in economic expansion, will take place during economic slow down. Such businesses are likely to experience much greater difficulties if they are not supported by a strong corporate parent. During the expansion phase of the product life cycle when even more sales and financing are needed, a recession cumulates problems. The best time for product introduction would seem to be during a recovery period when an optimistic attitude is spreading among investors and consumers. However, Graph G-14.11 shows that new business starts do not pick up at the trough, which suggests that either entrepreneurs are not able to anticipate the timing of economic recovery, or probably more realistically that enterepreneur are primarily encouraged by the optimism of an expanding economy to start their business.
If we look back at the periods of high growth of the computer industry in Graph G-14.3, the photocopying industry in Graph G-14.5, and aircraft manufacturing in Graph G-14.7, it is clear that the bursts of growth have little to do with relatively tiny variations in the overall economy.
See review questions Q-14D1.1 through Q-14D1.4.
See research assignment R-14D1.1.
| Previous: Business cycle | <
|
Next: Cyclical durable goods |