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Shaking up the Firm Survival: Evidence from Yogyakarta (Indonesia)

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  • Aloysius Gunadi Brata

    (Department of Economics, Atma Jaya Yogyakarta University, Jl. Babarsari No. 43, Yogyakarta 55283, Indonesia)

  • Henri L. F. De Groot

    (Department of Spatial Economics, Vrije Universiteit Amsterdam, 1081 HV Amsterdam, The Netherlands)

  • Wouter Zant

    (Department of Economics, Vrije Universiteit Amsterdam, 1081 HV Amsterdam, The Netherlands)

Abstract

The survival of firms under changes in the business environment caused by exogenous shocks can be explained using economic Darwinism. Exogenous shocks can cause ‘cleansing effects’. Shocks clean out unproductive firms so that available resources are allocated to the remaining more productive firms. However, shocks may also force out young firms that have the potential to be highly productive in the future, which will lower the average productivity of industries. This is known as the ‘scarring effect’ of shocks. Therefore, the overall impact of exogenous shocks on the allocation of resources depends on the relative magnitude of cleansing and scarring effects. This paper investigates this natural selection mechanism after the Yogyakarta earthquake in 2006. The study uses data on medium-sized and large manufacturing firms in the Yogyakarta province collected by the Indonesian Statistical Agency. The main finding of this paper is that firms that had higher productivity prior to the earthquake in 2006 were more likely to survive after the earthquake, which suggests the existence of a natural selection mechanism, specifically cleansing effects. There is no evidence of the scarring effects of the earthquake on the new entrants.

Suggested Citation

  • Aloysius Gunadi Brata & Henri L. F. De Groot & Wouter Zant, 2018. "Shaking up the Firm Survival: Evidence from Yogyakarta (Indonesia)," Economies, MDPI, vol. 6(2), pages 1-14, April.
    • Handle: RePEc:gam:jecomi:v:6:y:2018:i:2:p:26-:d:140097
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    References listed on IDEAS

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    Cited by:

    1. Cappelletti, Matilde & Giuffrida, Leonardo M., 2021. "Procuring survival," ZEW Discussion Papers 21-093, ZEW - Leibniz Centre for European Economic Research.
    2. Peter A.G. van Bergeijk, 2021. "Pandemic Economics," Books, Edward Elgar Publishing, number 20401.
    3. Matilde Cappelletti & Leonardo M. Giuffrida & Gabriele Rovigatti & Leonardo Maria Giuffrida, 2022. "Procuring Survival," CESifo Working Paper Series 10124, CESifo.

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    More about this item

    Keywords

    firm’s survival; exogenous shock; Yogyakarta earthquake; Indonesia;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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