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The reorganization decisions of troubled firms: exit, downscale or relocate

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Author Info
Leo Sleuwaegen ()
Enrico Pennings (Vlerick Leuven Gent Management School)

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Abstract

Poorly performing firms need to improve their profitability through restructuring their operations. In many cases this means downsizing by means of collective layoff of employees. Based on a unique sample of Belgian firms reporting collective layoffs this paper analyzes whether a firm dismisses all employees (exit), a significant proportion of its employees (downscaling), or closes down part of its activities and moves production abroad (international relocation). It is argued and demonstrated that the choice of downsizing approach differs depending on the strategic options and characteristics of the firm. We find that firms that downscale are more sensitive to profit changes. Relocating firms are labor intensive and move production to lower wage countries to operate more capital-intensive in Belgium in line with the comparative advantage of the country. Exiting firms are typically small and young underscoring the theory on evolutionary learning.

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Paper provided by Vlerick Leuven Gent Management School in its series Vlerick Leuven Gent Management School Working Paper Series with number 2002-21.

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Length: 21 pages
Date of creation: 02 Nov 2002
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Handle: RePEc:vlg:vlgwps:2002-21

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Collie, David R & Vandenbussche, Hylke, 2001. "Trade, FDI and Unions," CEPR Discussion Papers 2772, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Martha A. Schary, 1991. "The Probability of Exit," RAND Journal of Economics, The RAND Corporation, vol. 22(3), pages 339-353, Autumn. [Downloadable!] (restricted)
  3. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May. [Downloadable!] (restricted)
  4. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-38, June. [Downloadable!] (restricted)
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  5. Kang, Jun-Koo & Shivdasani, Anil, 1997. "Corporate restructuring during performance declines in Japan," Journal of Financial Economics, Elsevier, vol. 46(1), pages 29-65, October. [Downloadable!] (restricted)
  6. Pennings, Enrico & Sleuwaegen, Leo, 2000. "International relocation: firm and industry determinants," Economics Letters, Elsevier, vol. 67(2), pages 179-186, May. [Downloadable!] (restricted)
  7. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May. [Downloadable!] (restricted)
  8. Lichtenberg, Frank R., 1992. "Industrial de-diversification and its consequences for productivity," Journal of Economic Behavior & Organization, Elsevier, vol. 18(3), pages 427-438, August. [Downloadable!] (restricted)
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  9. Denis, David J. & Kruse, Timothy A., 2000. "Managerial discipline and corporate restructuring following performance declines," Journal of Financial Economics, Elsevier, vol. 55(3), pages 391-424, March. [Downloadable!] (restricted)
  10. Laura Rondi & Leo Sleuwaegen & Davide Vannoni, 2003. "Changes in the industrial and geographical diversification of leading firms in European manufacturing," Vlerick Leuven Gent Management School Working Paper Series 2003-8, Vlerick Leuven Gent Management School. [Downloadable!]
  11. Cordella, Tito & Grilo, Isabel, 1998. "'Globalization' and Relocation in a Vertically Differentiated Industry," CEPR Discussion Papers 1863, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  12. repec:att:wimass:19894 is not listed on IDEAS
  13. Leo Sleuwaegen & Koen Backer, 2001. "Multinational firms, market integration, and trade structure: What remains of the standard-goods hypothesis?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 137(3), pages 379-403, September. [Downloadable!] (restricted)
  14. Vuong, Quang H, 1989. "Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses," Econometrica, Econometric Society, vol. 57(2), pages 307-33, March. [Downloadable!] (restricted)
  15. Motta, Massimo & Thisse, Jacques-Francois, 1994. "Does environmental dumping lead to delocation?," European Economic Review, Elsevier, vol. 38(3-4), pages 563-576, April. [Downloadable!] (restricted)
  16. Slaughter, Matthew J., 2000. "Production transfer within multinational enterprises and American wages," Journal of International Economics, Elsevier, vol. 50(2), pages 449-472, April. [Downloadable!] (restricted)
  17. Feenstra, Robert C. & Hanson, Gordon H., 1997. "Foreign direct investment and relative wages: Evidence from Mexico's maquiladoras," Journal of International Economics, Elsevier, vol. 42(3-4), pages 371-393, May. [Downloadable!] (restricted)
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  18. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ilke Van Beveren, 2006. "Footloose Multinationals in Belgium," LICOS Discussion Papers 16806, LICOS - Centre for Institutions and Economic Performance, K.U.Leuven. [Downloadable!]
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