pioneering firms enter in sectors where competition is limited, such as extractive industries and mobile telephony, where government controls market access through concessions and licensing. If a pioneering firm is able to get a concession or a license for a particular resource (mineral deposit, bandwidth, and so on), then the firm may be willing to bear the market creation costs, as it can recoup these costs later from the rents it will earn on the resource. It is much harder to attract pioneer firms to sectors where rents are liable to be competed away by later entrants. Yet it is this process of subsequent entry, the shrinking of rents, and the expansion of the sector that is the key public benefit from pioneering, which means that guaranteeing that a pioneer will be able to preserve a monopoly is not a solution.

What do these fixed costs comprise? They are partly research costs—about the market, the regulatory framework, the quality and cost of labor, the quality of infrastructure, and so on which are unobservable costs until the first firm attempts production. Then other firms can free-ride on the market information revealed by the entry of the first firm.

Fixed costs are also partly relationship-building costs. The first firm to enter bears the costs of helping regulators, customs agents, banks, trading partners, and others to climb the ‘learning curve’. Governments frequently do not know how to tax or regulate a sector until the first business starts up. Or even if they have taxes and regulations on paper, there are start-up costs as they learn to implement. The weak market connections and financial market connections make these start-up costs much higher in fragile states.

**Table 3. Access to finance by young pioneers (aged 5-years or less): Controlled averages across firms**

||Firms with a bank<br>loan/line of credit<br>(%)|Proportion of<br>investments<br>financed by internal<br>funds (%)|<br>Proportion of<br>investments<br>financed by banks<br>(%)|Proportion of<br>working capital<br>financed by internal<br>funds (%)|Proportion of<br>working capital<br>financed by banks<br>(%)|<br>Cost of capital per<br>unit of value added|
|---|---|---|---|---|---|---|
|Pioneers|8.917***|-8.600***|5.388***|-9.257***|6.934***|-0.556**|
||(1.078)|(1.564)|(1.202)|(0.807)|(0.580)|(0.267)|
|Pioneers in FCS|-13.72***|13.37***|-11.33***|13.46***|-9.894***|0.657|
||(1.691)|(2.244)|(1.724)|(1.267)|(0.910)|(0.484)|
|Constant|26.12***|74.54***|12.77***|76.11***|11.76***|1.786***|
||(0.911)|(1.380)|(1.060)|(0.687)|(0.493)|(0.179)|
|Observations|7,508|2,757|2,757|7,499|7,499|1,390|
|R-squared|0.023|0.021|0.021|0.038|0.045|0.004|
|Sector fixed effects<br>Standard errors in parentheses<br>*** p<0.01, ** p<0.05, * p<0.1|Yes|Yes|Yes|Yes|Yes|Yes|

_Source:_ Calculations on World Bank Enterprise Surveys (2018).

_Note:_ The regression equation is specified as follows: x� �α�p�β�FCS �p�γ�δ� �ε� where x� indicates the figures in columns reported by firm _i_ ; p� is a binary indicator for pioneering; FCS is a binary indicator for operating in a fragile state, and δ� are sector fixed effects. Coefficient β reported under ‘Pioneers’ captures the average difference between pioneers in non-FCS and others i.e. non-pioneers operating anywhere, while controlling for the sector of economic activity. Coefficient γ reported under ‘Pioneers in FCS’ captures what is distinctive about pioneers in FCS, relative to pioneers in non-FCS i.e. the effect of fragility on pioneering.

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