Weathering the storm : responses by Cambodian firms to the global financial crisis
AbstractFirms have various ways to cope with external risks. This paper analyzes the risk coping behavior that entails the smoothing of inputs (labor, raw materials, or capital). The theoretical framework shows that, if they face adjustment costs, firms prefer to smooth their inputs, especially if they expect a demand shock to be temporary. However, credit constrained firms will be adversely affected by the presence of liquidity constraints, and this will create a welfare loss due to incomplete smoothing. The authors estimate this behavior using a panel of Cambodian firms at the time of the 2008 global economic crisis. The survey shows that these firms were hard hit by the economic crisis between 2008 and 2009, with an average fall in demand (sales) of 30 percent. Based on the theoretical framework, the analysis can estimate the responsiveness of labor, capital, and raw materials input demand to demand shocks. It finds that firms try to smooth in particular if they believe the shock is temporary; in fact non-credit constrained firms reduce their inputs much less than firmsthat were credit constrained when the demand shock is expected to be temporary. The paper estimates that the welfare loss from incomplete smoothing due to credit constraints is many multiples of the adjustment costs of the firms that were not credit constrained. This has important policy implications about the role of financial sector development and regulations beyond the capital market. This micro analysis also has macro implications: if all firms expect a shock to be permanent, their combined limited smoothing of inputs will indeed make the shock more likely to be permanent.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 6220.
Date of creation: 01 Oct 2012
Date of revision:
Economic Theory&Research; Access to Finance; Microfinance; Banks&Banking Reform; Labor Markets;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-10-20 (All new papers)
- NEP-DEV-2012-10-20 (Development)
- NEP-SEA-2012-10-20 (South East Asia)
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.:
- Townsend, Robert M, 1994.
"Risk and Insurance in Village India,"
Econometric Society, vol. 62(3), pages 539-91, May.
- Townsend, R.M., 1991. "Risk and Insurance in Village India," University of Chicago - Economics Research Center 91-3, Chicago - Economics Research Center.
- Robert M. Townsend, . "Risk and Insurance in Village India," University of Chicago - Population Research Center 91-3a, Chicago - Population Research Center.
- Daniel S. Hamermesh & Gerard A. Pfann, 1996.
"Adjustment Costs in Factor Demand,"
Journal of Economic Literature,
American Economic Association, vol. 34(3), pages 1264-1292, September.
- Tarun Khanna & Yishay Yafeh, 2005. "Business Groups and Risk Sharing around the World," The Journal of Business, University of Chicago Press, vol. 78(1), pages 301-340, January.
- Paul Gertler & Jonathan Gruber, 1997.
"Insuring Consumption Against Illness,"
NBER Working Papers
6035, National Bureau of Economic Research, Inc.
- Dionisius Narjoko & Hal Hill, 2007.
"Winners and Losers during a Deep Economic Crisis: Firm-level Evidence from Indonesian Manufacturing ,"
Asian Economic Journal,
East Asian Economic Association, vol. 21(4), pages 343-368, December.
- Dionisius Narjoko & Hal Hill, 2006. "Winners and Losers during a Deep Economic Crisis: Firm-level Evidence from Indonesian Manufacturing," Departmental Working Papers 2006-13, The Australian National University, Arndt-Corden Department of Economics.
- Murillo Campello & John Graham & Campbell R. Harvey, 2009.
"The Real Effects of Financial Constraints: Evidence from a Financial Crisis,"
NBER Working Papers
15552, National Bureau of Economic Research, Inc.
- Campello, Murillo & Graham, John R. & Harvey, Campbell R., 2010. "The real effects of financial constraints: Evidence from a financial crisis," Journal of Financial Economics, Elsevier, vol. 97(3), pages 470-487, September.
- Paci, Pierella & Revenga, Ana & Rijkers, Bob, 2009. "Coping with crises : why and how to protect employment and earnings," Policy Research Working Paper Series 5094, The World Bank.
- Jonathan Morduch, 1995.
"Income Smoothing and Consumption Smoothing,"
Harvard Institute of Economic Research Working Papers
1727, Harvard - Institute of Economic Research.
- Hallward-Driemeier, Mary & Rijkers, Bob, 2011.
"Do crises catalyze creative destruction ? firm-level evidence from Indonesia,"
Policy Research Working Paper Series
5869, The World Bank.
- Mary Hallward-Driemeier & Bob Rijkers, 2013. "Do Crises Catalyze Creative Destruction? Firm-level Evidence from Indonesia," The Review of Economics and Statistics, MIT Press, vol. 95(5), pages 1788-1810, December.
- Arne Bigsten & Paul Collier & Stefan Dercon & Marcel Fafchamps & Jan Willem Gunning & Abena Oduro & Remco Oostendorp & Cathy Pattillo & Mans Söderbom & Francis Teal & Albert Zeufack, 2003.
"Risk Sharing in Labour Markets,"
Tinbergen Institute Discussion Papers
03-077/2, Tinbergen Institute.
- Arne Bigsten & Paul Collier & Stefan Dercon & Marcel Fafchamps & Bernard Gauthier & Jan Willem Gunning & Abena Oduro & Remco Oostendorp & Cathy Pattillo & Mans S–derbom & Francis Teal & Albert Zeufa, 2003. "Risk Sharing in Labor Markets," World Bank Economic Review, World Bank Group, vol. 17(3), pages 349-366, December.
- Rafael Repullo & Javier Suarez, 2012.
"The Procyclical Effects Of Bank Capital Regulation,"
- Rafael Repullo & Javier Suarez, 2013. "The Procyclical Effects of Bank Capital Regulation," Review of Financial Studies, Society for Financial Studies, vol. 26(2), pages 452-490.
- Repullo, R. & Suarez, J., 2010. "The Procyclical Effects of Bank Capital Regulation," Discussion Paper 2010-29S, Tilburg University, Center for Economic Research.
- Repullo, Rafael & Suarez, Javier, 2012. "The Procyclical Effects of Bank Capital Regulation," CEPR Discussion Papers 8897, C.E.P.R. Discussion Papers.
- Paxson, Christina H, 1992. "Using Weather Variability to Estimate the Response of Savings to Transitory Income in Thailand," American Economic Review, American Economic Association, vol. 82(1), pages 15-33, March.
- Fafchamps, Marcel, 2000. "Ethnicity and credit in African manufacturing," Journal of Development Economics, Elsevier, vol. 61(1), pages 205-235, February.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi).
If references are entirely missing, you can add them using this form.