F. Christopher Eaglin

Abstract

This paper analyzes the impact of initial conditions on firm strategy selection and performance. Existing literature would suggest that resource constrained entrepreneurs in settings of high uncertainty would perform worse under more pressure at the start of operations. However, I find the opposite. Using a proprietary dataset from a minibus taxi financier and monthly fuel prices, I estimate the impact of a higher than expected fuel prices in the first three months of operation on strategy selection and performance. I find that firms receiving this higher fuel shock are more likely to increase asset utilization. This pattern persists long after the founding of the firm and is linked to higher survival rates. Qualitative and survey evidence suggests that this counterintuitive result occurs due to how firms respond to increased early pressure. Rather than exiting early, firms instead focus on higher productivity. During the first three months, critical to strategy setting, firms increase asset utilization by running additional routes, commit to this strategy, and resist change even if presented with alternative practices. These findings suggest that nascent firms might benefit from more pressure to develop profitable strategies, even if that process is initially distressing.