EXPORT‐MARKET DYNAMICS AND THE PROBABILITY OF FIRM CLOSURE: EVIDENCE FOR THE UNITED KINGDOM
| Author | Qian Cher Li,Richard I. D. Harris |
| DOI | http://doi.org/10.1111/j.1467-9485.2010.00511.x |
| Published date | 01 May 2010 |
| Date | 01 May 2010 |
EXPORT-MARKET DYNAMICS AND THE
PROBABILITY OF FIRM CLOSURE:
EVIDENCE FOR THE UNITED KINGDOM
Richard I. D. Harris
n
and Qian Cher Li
nn
Abstract
This study presents the first empirical analysis of the determinants of firm
closure in the United Kingdom with an emphasis on the role of export-market
dynamics, using panel data for a nationally representative group of firms operating
in all-market-based sectors during 1997–2003. Our findings show that the
probability of closure is (cet. par.) significantly lower for exporters, particularly
those experiencing export-market entry and exit. Having controlled for other
attributes associated with productivity (such as size and export status), the
following factors are found to increase the firm’s survival prospects: higher capital
intensity and TFP, foreign ownership, young age, displacement effects (through
relatively high rates of entry of firms in each industry), and belonging to certain
industries. Interestingly, increased import penetration (a proxy for lower trade
costs) leads to a lower hazard rate for exporting entrants and continuous
exporters, while inducing a higher hazard rate for domestic producers or those that
quit exporting.
I Intro ductio n
Substantial evidence of the benefits from international trade has been well
documented in both theoretical and empirical literature, which often provides
governments in various countries with a rationale for intervention to help firms
develop their exporting activities when market failures are present. These
benefits are largely linked to the higher productivity of exporters, which then
contribute to overall UK productivity growth through various channels, such as
the entry of higher productivity exporters (including the so-called ‘born global’
companies; see Oviatt and McDougall, 1995); existing exporters becoming more
productive over time and/or intra-industry resources are reallocated to higher
productivity exporters; and the shutdown of lower productivity firms – especially
non-exporters with the lowest productivity levels, as predicted by some recent
theoretical models (Bernard et al., 2003; Melitz, 2003).
n
University of Glasgow
nn
Imperial College London
Scottish Journal of Political Economy, Vol. 57, No. 2, May 2010
r2010 The Authors
Journal compilation r2010 Scottish Economic Society. Published by Blackwell Publishing Ltd,
9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA
145
Thus it is not surprising that many government programmes aimed at export
promotion help firms enter export markets and, given this, it is relevant to ask if
(new) exporters will be able to enjoy better survival prospects (vis-a
`-vis those
having not entered such international markets) where risk, uncertainty and
competition are all likely to be higher. Understanding which factors determine
the firm’s risk of closure in international markets holds the key to evaluating the
efficacy of export-promotion policies. As pointed out by Alvarez and Lo
´pez
(2006), if survivability of businesses depends on trade costs, public policies might
concentrate on reducing these costs. By contrast, if firms’ hazard rates of closure
in export markets are the result of large differences in productivity between
exporters and non-exporters, then polices that concentrate on facilitating entry
may not generate lasting increases in export participation if they are not
accompanied by improvements in firms’ productivity.
Early theoretical work was particularly concerned with how productivity was
related to initial size, the learning-by-doing effect associated with the age of a
new entrant, and the likelihood of survival (cf. Jovanovic, 1982; Pakes and
Ericson, 1998). Both initial size and age are positively related to survival, both in
theoretical models and in the overwhelming majority of empirical results
obtained (e.g. Harris and Hassaszadeh, 2002; Disney et al., 2003). In addition,
firms that ‘actively learn’ by investing in intangible assets (and consequently
increase their specific internal capabilities and ability to absorb external
knowledge) are expected more likely to survive (Olley and Pakes, 1996; Esteve
Pe
´rez et al., 2004). From a global perspective, firms can acquire (external)
knowledge through participating in export markets, so those operating in
overseas markets are expected to have better (cet. par.) survival prospects.
Exporting can also signal positive information about the firm, beyond measured
productivity, so exporters should have a lower probability of failure.
Previous literature has provided both theoretical and empirical evidence on
the determinants of firm closure; nevertheless, little is known regarding the
impact of changing exporting status (and/or export-market dynamics) on the
firm’ rate of survival. To the best of our knowledge, this is the first micro-based
investigation in this regard using comprehensive and nationally representative
data for the UK firms,
1
covering all market-based sectors.
In particular, this paper considers whether exporting and the lowering of
trade costs more generally impact on firm survival rates. In an attempt to add to
the rather limited body of evidence on firm closure in the context of
international trade, our results show that exporting firms have lower
probabilities of closure, conditional on controlling for other factors linked to
productivity. In addition, higher import penetration raises the hazard rates of
1
Ideally we would wish to consider plant closure, as this would allow us to look at the
behaviour of multi-plant enterprises and thus how decisions are made about changes in output
capacity (including product lines) without necessarily ceasing production altogether. However,
we do not have plant-level information in the data used for this study, and must therefore
concentrate on an analysis at the firm level – recognising that the vast majority of firms are
single-plant enterprises. Thus, in what follows, we usually refer to the firm as our ‘unit of
analysis’.
RICHARD I. D. HARRIS AND QIAN CHER LI146
r2010 The Authors
Journal compilation r2010 Scottish Economic Society
To continue reading
Request your trial