Firm Exit Research Articles

Key Factors Behind Productivity Trends in EU Countries

The aim of this report is to foster a better understanding of past trends in, and drivers of, productivity growth in the countries of the European Union (EU) and of the interplay between productivity and monetary policy. To this end, a group of experts from 15 national central banks and the European Central Bank (ECB) joined forces and pooled data and expertise for more than 18 months to produce the report. Group members drew on the extensive research already conducted on productivity growth, including within the European System of Central Banks and in the context of the review of the ECB’s monetary policy strategy, and worked together to conduct new analyses.After recalling the key facts and figures, the report looks into the predominant drivers of productivity growth in firms, with a focus on technology as a key determinant of aggregate productivity dynamics. It then discusses the main factors behind resource reallocation both across incumbent firms and as a result of the entry and exit of firms. Although productivity is a real-economy phenomenon and its evolution predominantly hinges on the structural features of the economy and national policies, the report also raises the question of the extent to which, and under what circumstances, monetary policy may affect productivity. In addition, it places productivity in a broader perspective by taking into account other important structural trends that are expected to have an impact on productivity in the medium-to-long run, such as globalisation, population ageing, climate change and digitalisation. Finally, the report considers the possible impacts of the coronavirus (COVID-19) pandemic on productivity in EU countries. ...

The Cultural Roots of Firm Entry, Exit, and Growth

Can culture explain persistent differences in economic activity among individuals and across regions? A novel measure of cultural origin enables us to contrast the entrepreneurial activity of individuals located in the same municipality but whose ancestors lived just on opposite sides of the Swiss language border in the 18th century. Individuals with ancestry from the German-speaking side create 20% more firms than those with ancestry from the French-speaking side. These differences persist over generations and independent of the predominant culture at the current location. Yet, founders’ ancestry does not affect exit or growth of newly-founded firms. A model of entrepreneurial choice and complementary survey evidence suggest that the empirical patterns are mainly explained by differences in preferences, rather than skill. The results have sizable economic implications, accounting for 120,000 additional jobs over a period of 15 years.

Entry and Exit of Informal Firms and Development

Non-farm informal businesses comprise the majority of the firm distribution in developing countries. We document novel stylized facts about entry and exit of informal, non-farm firms using nationally representative panel data over 15 years and across regions with varying levels of local economic development in Vietnam. First, we find that informal businesses exhibit rates of entry and exit around 14-18% annually. Entry and exit rates are similar and highly correlated at a point in time, within industries, and within regions. They both decline over time and across space with economic development. Second, although market selection influences which firms survive, entry and exit has little net effect on aggregate (revenue) productivity or hiring of workers outside the household. This owes to overlapping labor productivity of entering and exiting firms and low subsequent productivity growth and hiring among the surviving entrants. Nonetheless, entry and exit are associated with large changes in individual income. Third, the large overlap in revenue of entering and exiting informal businesses and the high correlation between entry and exit rates are related to the education of owners and their economic activities before and after operating an informal business. Informal business owners are less educated on average than wage workers in the formal sector, but more educated than agricultural workers. The transitions in and out of operating an informal business reflect the underlying structure of economic activities of the working age population, with education gaps also playing a role. The most common transition into non-farm businesses is to and from self-employment in agriculture. The likelihood of this transition declines with economic development, highlighting the role of net entry from agriculture into informal non-farm businesses in structural change.

Cournot, Pigou, and Ricardo Walk in a Bar – Unilateral Environmental Policy and Leakage With Market Power and Firm Heterogeneity.

Policymakers aiming for the unilateral regulation of transboundary pollutants, such as greenhouse gases, fear as a consequence rising emissions in non-regulating countries. This so-called pollution haven or carbon leakage effect is of particular concern in emission-intensive and trade-exposed sectors such as steel, aluminium or chemical production. While these industries are often characterised by market concentration, most models that study the effectiveness of unilateral environmental policies operate under perfect or monopolistic competition, ruling out the adjustment of markups and cost pass-through rates. We study the determinants of emission leakage using a two-country general equilibrium model with heterogeneous product varieties and Cournot competition. We show that firms from the non-regulating country respond to the implementation of Pigouvian emission taxes on their competitors abroad and the subsequent gain in comparative advantage by increasing markups rather than output. We find that this effect, jointly with the exit of the least productive firms, can provoke a reduction of emissions in the non-regulating country and thus increase the effectiveness of unilateral emission regulation. Consumption gains from selection in non-regulating countries are offset by the use of market power by local firms.

Endogenous Product Scope: Market Interlacing and Aggregate Business Cycle Dynamics

This paper examines a market interlacing industry configuration in general equilibrium with multi-product firms. In contrast to previous studies which utilize market segmentation, firms produce multiple products even in the complete absence of the love of variety. Product scopes are procyclical and entry and exit of firms generates an endogenous amplification mechanism. When simulated by shocks derived from the efficiency and labor wedges, the model replicates the changes in dynamics between the pre- and post 1983 periods, and explains the hours-productivity puzzle.

Global Productivity and Market Structure Implications of the US-China Trade War: A CGE Modeling Approach

Purpose – As the US-China trade war intensifies and lasts long time, there is growing concern about its potential effects on the global economy. In particular, for the countries like Korea that have a large economic dependence on the economy of the two countries, the US-China trade war may have a great repercussion in many ways. The aim of this paper is to investigate the global productivity and market structure implications of the US-China trade war for Korea, as well as for other surrounding countries and regions. Design/methodology – In this paper, we develop a full multi-country/region multi-sector computable general equilibrium (CGE) model of global trade incorporating heterogeneous workers and firms in individual skill levels and used technologies. We then calibrate the model using a global Social Accounting Matrix (SAM) dataset extracted from the recently released GTAP 10 Database, and assess the potential effects of the US-China trade war on the aggregate real productivity and the market structure for Korea, as well as for other surrounding countries and regions. Findings – We show that the US-China trade war may largely affect the aggregate productivity in each sector in each country/region, as well as the global market structure through entry and exit of firms, which results finally in considerable changes in the industrial comparative advantage of each country/region. Though the effects are diverse sector by sector, the results show that Korea may also be affected significantly: concerning the real productivity implications, it is shown that the machinery industry may be affected the most negatively; on the other hand, it is shown that the number of exporting firms may decrease the most in the other transports industry. Originality/value – As the US-China trade war intensifies, many studies have tried to estimate the possible implications, and for this usually the CGE models have largely been used as the standard tool for evaluating the impacts of changes in trade policies. Standard CGE models, however, cannot be used to assess the global productivity and market structure implications due to the symmetric and simplified base assumptions. This paper is the first to analyze and quantify the possible impacts of the US-China trade war on the aggregate productivity and global market structure using a CGE model incorporating endogenous skill-technology assignment of heterogeneous workers and firms.

FDI’s Crowding out Effect on the Exit of Domestic Firms in the Textile and Garment Industry

For the Vietnamese economy in general and the textile and garment industry in particular, FDI is a external resource that brings many positive effects. However, the presence of FDI enterprises can cause the negative impact of creating crowding out effect on domestic firms. This study is conducted to answer the question of whether the presence of FDI enterprises affect the survival of domestic firms or not? The authors apply the logistic regression model to analyze the crowding out effect of FDI on the exit of domestic firms, using the case of the textile and garment processing industry which has a key role in Vietnam manufacturing industry and also attracted a large amount of FDI in recent years, to find evidence for this impact. Thereby, the research team will gives some policy implications to minimize the negative impact (if any) of FDI on domestic firms.

Firm Exit during the COVID-19 Pandemic: Evidence from Japan

Firms have exited the market since the start of the COVID-19 pandemic. To evaluate the number of firms exiting the market and their exit rate, we construct a simple model, in which firms optimally choose stopping time for their exit. We estimate the model using firm-level data on firm exits before the pandemic. Subsequently, using recent survey data on firm sales growth, we simulate potential firm exits during the pandemic under the condition that the institutional background, represented by activities such as bankruptcy procedures and government rescue plans, did not change the exit option value. Our main findings are as follows. First, we find sizable heterogeneity with respect to the number and rate of firm exits across industries and regions. Second, in aggregate, the pandemic potentially increased firm exits by around 20% compared to the previous year under the assumption that the recent reduction in firm sales is temporary and, thus, partially incorporated into firms’ expectations for future trend sales growth. In two extreme cases in which the recent sales reduction has a full or no impact on firms’ expectations for future sales, firm exits increased by 110% and 10%, respectively. Third, these increases are mainly due to the decrease in the expected sales growth rate, rather than the increase in uncertainty. Finally, we quantify the hypothetical amount of government subsidies needed to prevent excess increases in potential firm exits, which is around 10−3 of Japan’s GDP.

Entry, Exit and Innovation over the Industry Life Cycle in Converging Sectors: An Analysis of the Smartphone Industry

This paper examines the digital convergence process that led to the development of the smartphone sector and the dynamics of entry, exit and innovation over the industry life cycle. We have verified, by a historical-longitudinal study, if several empirical regularities that characterize the evolution of firms and industries over time have distinguished also an industry born from a sectoral convergence process. From the analysis it emerged that the evolution of market sales and of product innovation in the smartphone industry, as well as firms entry and exit dynamics, are consistent with the evolutionary model identified by technology management and industry life cycle studies. It has also been found that the convergence process has favored the entry and the survival of new entrants, compared to the incumbent firms, coming from the native converging sectors – that of Personal digital assistants and of Mobile (feature) phones – from which the smartphone industry originated.

Appropriation, firm dynamics, and wage inequality

AbstractThis paper examines the income distribution and welfare effects of appropriation activities in an economy. In the short run, with a given number of firms, appropriation can narrow wage inequality between skilled and unskilled labor when the capital resources accrued by appropriators are not large. However, wage inequality widens when the capital accrued is large. In the long run, with free entry and exit of firms, an increase in appropriation can cause firms to enter when the accrued capital is not large. This gives rise to a win–win outcome by raising the wages of skilled and unskilled labor. However, if accrued capital is large, firms exit and a lose–lose situation may occur in which skilled and unskilled wages are reduced.

Time to exit: \u201crevolving door effect\u201d or \u201cSchumpeterian gale of creative destruction\u201d?

Over the past decades, exit has been analyzed at the theoretical and empirical levels. From this rich series of contributions, two basic patterns of exit can be identified: the revolving door and the gale of creative destruction. In the first, the liability of newness plays a major role in the exit process, while in the second the displacement of non-innovators is the driver of exit. We have tested these two patterns of exit on the population of Dutch firms that exited in 2018. We find confirmation that the two patterns characterize different types of industries. In industries in which innovation does not play a major role, the revolving door effect is the typical pattern and exit is concentrated among the adolescent firms. These firms are also small in size. On the contrary, in industries in which innovation plays a role, exit takes place both among infant as well as mature firms. Exiters are not necessarily only the smaller firms. While a highly innovative and uncertain environment can threaten the survival of infant firms, the exit of mature firms is driven by the innovation of young firms, following the gale of creative destruction.

Intermediated Credit and Local Resilience

This paper demonstrates the importance of bank capital in improving local resilience and the complementarity of bank capital and government aid programs. We show that following the COVID-19 pandemic and shutdown, areas with more jobs supported by subsidized bank loans during normal times had more job losses and business closures, and more so if the local banking sector is less capitalized. Such losses were heavily borne by low-income workers. We also find that areas with a less capitalized banking sector received disproportionately less Paycheck Protection Program funding. Using a dynamic model of firm entry and exit with bank borrowing, we formulate the mechanism of how bank capital can mitigate the impact of adverse aggregate shocks on employment and firm exit. We calibrate the model to quantify effects of bank capital on resilience and the amount of government funding necessary for full resilience in various simulated scenarios of adverse shocks and bank capitalization.

Offshoring and non-monotonic employment effects across industries in general equilibrium

We address the mismatch between existing theoretical models and standard empirical practice in the analysis of the labor market effects of offshoring. While theory focuses on one-sector or two-sector models, empirical studies exploit variation in offshoring across a large number of industries, typically including a linear offshoring term in the analysis. Thereby, these studies implicitly assume a monotonic relationship between offshoring and labor market outcomes and ignore general-equilibrium effects across industries. We analyze the effects of offshoring across a continuum of industries with different shares of offshorable tasks that are linked through labor and capital markets in general oligopolistic equilibrium (GOLE). Our main result is that offshoring generates a hump-shaped pattern of employment changes across industries. While the relocation effect reduces employment in offshoring-intensive industries, labor demand in industries with a high prevalence of domestic production falls because of rising domestic wages and firm exits in general equilibrium. In the empirical part, we test the non-monotonic employment effects across industries in response to an offshoring shock by focusing on Germany after the fall of the Iron Curtain. We find strong empirical support for the hump shape in the changes of employment across industries with different scopes for offshoring, which is almost entirely due to the extensive margin, underscoring the importance of establishment entry and exit. Finally, we discuss important implications for empirical and theoretical research arising from our study.

From invention to industry from a social movement perspective: the emergence of the 3D printing industry

In the entrepreneurship literature, the phenomenon of industry emergence has been largely investigated from an institutional perspective. Appropriate institutions would allow then a group of individual entrepreneurs (“the heroes”) to create an industry through innovative ventures. New ventures create new industries and firm entry, survival, and exit drive industry evolution. Our research, however, explores what creates the favorable set of circumstances for new ventures to emerge and focuses on the pre-emergence phase and we propose that the patterns of emergence resemble those of social movements. Through an actor perspective, this research highlights the existence of diverse actors, not necessarily entrepreneurs, who are necessary to trigger a collective action during the pre-emergence phase of industries. This research is also distinct from entrepreneurial ecosystems as its development already requires some successful entrepreneurial action. The 3D printing industry was chosen as a single longitudinal case study, where the actors are the embedded units of analysis. The findings of the study lead to the identification of three aggregate dimensions—“Social Movement Composition,” Temporal Engagement,” and “Coalitions Development”—that were prevalent during the pre-emergence phase of the 3D printing industry. Our propositions emphasize the importance of large collective action and the role of multiple actors in order to create the conditions for, first, firm emergence and, the second, to the process of industry emergence.

Structural Changes in Japanese Firms: Business Dynamism in an Aging Society

The COVID-19 pandemic has posed a serious threat to the survival of Japanese firms, highlighting the importance of understanding how and why firms exit. In this paper, we use a rich firm-level dataset of Japanese firms to document how firm exit patterns have evolved between 2007 and 2017. Firm exit patterns have been heavily influenced by Japan’s demographic trends, as a majority of exits in recent years were voluntary exits of firms (business closures) owned by CEOs aged 65 years or older without business successors. In contrast to this increase in voluntary exits, other “traditional” firm exits (such as bankruptcies), have declined. These findings underscore the importance of addressing business transition issues in a rapidly aging society.

Structural Changes in Japanese Firms

The COVID-19 pandemic has posed a serious threat to the survival of Japanese firms, highlighting the importance of understanding how and why firms exit. In this paper, we use a rich firm-level dataset of Japanese firms to document how firm exit patterns have evolved between 2007 and 2017. Firm exit patterns have been heavily influenced by Japan’s demographic trends, as a majority of exits in recent years were voluntary exits of firms (business closures) owned by CEOs aged 65 years or older without business successors. In contrast to this increase in voluntary exits, other “traditional” firm exits (such as bankruptcies), have declined. These findings underscore the importance of addressing business transition issues in a rapidly aging society.

Gender differences in Russia's job mobility and its rewards*

AbstractThis article considers age and gender differences in the probability and consequences of job mobility in Russia. Little is known about who is mobile and whether mobility impacts wages once the characteristics of movers are controlled for. Results show a gender difference in the likelihood of exit but not promotion. Results also show that promotions have a positive effect only on the wages of young women, but young men's wages are not affected. Further, young men see a significant decrease in wages following an exit, while young women are not affected by firm exit. The article shows that early mobility is particularly important for women, who earn less overall. Results help to understand processes of inequality in wages and conditions that occur due to sorting, and the importance of promotions as ‘life chances’ which lead to ‘career‐track jobs’. Gender differences in securing such life chances may help to understand gaps in earnings, which emerge later.

Returns to Entrepreneurial Experience Over the Business Cycle (WITHDRAWN)

In this paper, I explore business cycle-related dynamics in the returns to entrepreneurial experience. Using time-series geographic variation in economic conditions, I disentangle the effects of shocks to aggregate demand, alternative employment options, and credit availability on differences in firm exit rates between serial and novice entrepreneurs. Weibull survival model estimates indicate that serial entrepreneurs are more likely to endure negative shocks to aggregate income and credit availability, but are relatively more likely to go out of business as slack increases in the labor market. In the second part of the paper, I provide evidence that these dynamics are driven by differences in access to financial resources and business strategies.

Market exit of firms: Does corruption act as grease or sand?

This paper examines whether corruption acts to “grease” or “sand” firms' exit. Corruption could facilitate exit when it is a tax that distorts markets, or it might retard exit when it empowers firms to obtain undue favors. Results, using panel data across US states and considering market exit and firms' death rates as dependent variables, show that greater corruption acts as grease rather than sand in that it facilitates firms' exit/death. In other findings, larger states, greater regulations, and more unemployment contributed to exit, as did some demographic aspects. Higher state minimum wages resulted in firms' death but not exit.

Employee compensation and new venture performance: does benefit type matter?

Using insights from strategic human resource management, we examine how employee benefits affect new venture performance. We hypothesize that two categories of benefits affect new venture performance and might do so differently: benefits that promote stability and flexibility. Using employee benefits data from the Kauffman Firm Survey, we find that new ventures that provide stability benefits—healthcare plans, tuition reimbursement, and retirement plans—have lower rates of exit and higher odds of earning a profit. Conversely, we find that firms that provide flexibility benefits—financial packages, stock ownership, bonus pay, and paid sick and vacation leave—do not affect firm exit rates but, with the exception of stock options, also have higher profits. We use IV methods to control for the possibility of reverse causality—firms that can afford to provide better employee benefits probably have better performance. Our IV results support our findings and suggest that firms that provide better employee benefits have lower exit rates and higher odds of earning a profit.