Abstract
This study analyzes both the determinants of small firm exit rates in US manufacturing over the 1989–2004 period, especially the reaction of domestic firms to the nature of foreign competition as measured by industry-specific real exchange rate movements (interacted with import penetration by industry). These international pressures seem to lead to increased rates of smallest-firm exit in manufacturing, though the magnitudes of these effects are smaller than sometimes discussed. However, high-tech industries avoid much of this impact; patents and a reputation for innovation may shield a small firm somewhat from lower-priced foreign competitors.
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Notes
This is the conventional cutoff for research purposes, though the US Small Business Administration uses revenue limits in defining small businesses outside of manufacturing and mining, especially for applicability for government preferential programs.
Recent work by Balasubramanian and Sivadasan [2011] combines detailed NBER patent data and Census microdata to find significant firm size and productivity gains in patenting firms.
There does seem to be a post-9/11 spike — in 2002 — in exit rates for the very smallest and largest of these size categories.
As the dependent variable, exit rate, is a “limited dependent variable” which by definition cannot fall below zero, an alternative estimation approach — a Tobit estimation with random industry effects — using the xttobit routine in STATA — was also attempted, with results quite similar to what is reported below in Tables 6 and 7. Allowing for within-industry autocorrelation was also tested, with results again similar to those reported here. Hausman tests support random vs fixed effects in six of the eight regression specifications at the 5 percent level of significance, in all eight at 1 percent.
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Acknowledgements
The author is grateful for financial support from the US Small Business Administration under Contract # SBAHQ07M0404, and to Brian Headd and two anonymous referees for helpful comments and suggestions on earlier drafts. Views expressed are those of the author alone, and are not those of the US Small Business Administration.
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Feinberg, R. International Competition and Small-Firm Exit in US Manufacturing. Eastern Econ J 39, 402–414 (2013). https://doi.org/10.1057/eej.2012.19
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DOI: https://doi.org/10.1057/eej.2012.19