Recession and firm survival: is selection based on cleansing or skill accumulation?

Abstract

Recessions are complex events that create highly unpredictable and unstable business environments. When faced with such events, firm survival depends only limitedly on production efficiency. Rather, it depends on the skills and ability to cope with such complexity. In particular, we expect firms adopting a corporate strategy that makes relatively large use of skills and capabilities to deal with environmental complexity to be less likely to exit during a downturn than firms that do not. We test this hypothesis on the whole population of Italian manufacturing corporations using an open panel that covers the period 2001–2013. The results provide strong support for our hypotheses in the full sample and in the subsamples of small firms, thus suggesting that skill development can successfully empower smaller and more vulnerable firms. Managerial and policy implications are discussed.

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Notes

  1. 1.

    We do not consider the last year of the original panel due to the lack of full information about closure events.

  2. 2.

    In our data, exit is considered a homogeneous event. We are not able to distinguish between different exit modes and, thus, to control for M&A. Although we recognize this data limitation, it is worth stressing that the number of M&A in Italy continues to be very limited. According to KPMG estimations (KPMG 2015) in 2007, we had in Italy 459 M&A deals for a value of 148 billion euros. In 2009, the number dropped to 197 deals equal to 34 billion euros. A recovery has been registered during the following years with 381 deals in 2013 (31 billion euros).

  3. 3.

    According to the Eurostat-OECD (2007)a real death, or an enterprise “is an independent event affecting only one enterprise, and involving the dissolution of a combination of factors of production. It involves the deletion of an enterprise reference on the (live) business register.”

  4. 4.

    Note that, according to official statistics, Italy entered the big recession in the mid-2007. Also, note that we only have yearly observations in the end of the period, thus we cannot evaluate intra-year changes.

  5. 5.

    Our choice of labour productivity instead of other measures of production efficiency, such as total-factor-productivity (TFP), is justified on both empirical and theoretical grounds. The empirical justification is that our data do not allow us to obtain a reliable measure of TFP. On the theoretical ground, the use of TFP would force us to make strong assumptions about the nature of the production function. Some of these assumptions are not consistent with the interpretative framework used to derive our research hypotheses (i.e., capability-based perspective). Moreover, there is empirical evidence, based on international comparisons which included the Italian economy, suggesting labour productivity and TFP tend to be highly correlated and have similar explicative power so far as industrial dynamics are concerned (Berlingieri et al. 2017).

  6. 6.

    In non-linear models, the interaction effect of, say, X1 and X2 is the cross partial derivative of the expected value of the dependent variable with respect to the multiplicative term X1 × X2 (Buis 2010). Stata’s output reports both the coefficient for the stand-alone variable X (the contribution of the X variable at the reference period, that is before the crisis d0813 = 0) and the coefficient for the interacted term X*d0813 (the difference in the effect of the X variable due to the crisis). By using this notation, the hazard rate during the crisis is given as described in the text, in multiplicative terms, that is the value for the X*d0813 term times the value of the stand-alone variable (d0813 = 0).

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Acknowledgements

This work is a result of a collaboration developed within the project Business demography during the great recession: patterns of resilience and productivity dispersion, which is part of a three-year strategic research plan promoted by the National Institute of Statistics (ISTAT). The empirical part of this research was carried out at the ISTAT Regional Office for Lombardy in Milano. We would like to acknowledge the support of Roberto Monducci, Head of the Statistics Production Department, and Rosalia Coniglio, Director of the Regional Office for Lombardy. The views expressed in this paper are those of the authors and do not necessarily reflect the views of ISTAT.

We thank the participants to the SIEPI 2018 Annual Workshop—University of Ferrara, the EARIE 2019 Annual Conference—Barcelona Graduate School of Economics, 30 August–1 September 2019 and the SIE 2019 Annual Conference—Università di Palermo, 24–26 October 2019, for the useful comments.

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Appendix 1

Appendix 1

Table 6 Variable definition and descriptive statistics—selected years

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Bartoloni, E., Arrighetti, A. & Landini, F. Recession and firm survival: is selection based on cleansing or skill accumulation?. Small Bus Econ (2020). https://doi.org/10.1007/s11187-020-00378-0

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Keywords

  • Firm survival
  • Corporate strategy
  • Recession
  • Cleansing
  • Skill accumulation

JEL classification

  • D22
  • L21
  • M21
  • L26