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Globalisation and firm exit: Differences between small and large firms
Colantone, Italo ; Coucke, Kristien ; Sleuwaegen, Leo
Colantone, Italo
Coucke, Kristien
Sleuwaegen, Leo
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Publication Type
Working paper
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Supervisor
Publication Year
2008
Journal
Book
Publication Volume
Publication Issue
6
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Publication End page
Publication Number of pages
37
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Abstract
The effects of increasing import competition on output displacement and exit of heterogeneousdomestic firms are investigated within the context of an oligopolistic rivalry model.The displacement effect is found to be stronger for large "output flexible" firms, while small"cost flexible" ones are less affected by increasing import pressure. Extending the model to allow for product heterogeneity between domestic and foreign firms, we also find that product differentiation lowers the displacement effect. The theoretical findings are supported at the empirical level by the analysis of firm exit dynamics for 12 manufacturing sectors in 8 European countries, from 1997 to 2003. In particular, we find that the exit of large firms is sensitive to the shock of increasing import penetration from low-wage countries. Small firms in the same industries are instead only affected by marginal trade integration with respect to neighbouring EU countries and other relatively wealthy trading partners. Hence this paper shows, for the first time, that firms of different size might be affected differently by diverse sources of import competition. Implications on firms’ strategic planning and public policy are discussed.
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Keywords
Strategic Context & International Business, Oligopolistic Competition, Low-Wage Country Import Competition, Firm Exit