Entry diversion: Entry barriers to divert submarket entry

Deterring entrants has long been a key concern for incumbents, yet scholars struggle to create a theoretical foundation that is consistent with the empirical patterns. We introduce a new mechanism, entry diversion, to resolve the inconsistency between the persistence of firm entry and the effectiveness of entry barriers. Entry diversion happens when preemptive strategic investments by incumbents decrease the expected future profits from a target submarket down to a level that entrants choose to enter another submarket within the same industry. Empirical evidence from the global semiconductor manufacturing industry shows that incumbents respond to the threat of entry by expanding their capacities, and that these investments effectively divert entry into other submarkets. Lacking pre-developed resources and capabilities, greenfield entrants are easier to divert than diversifying entrants.