Exit in Developing Countries: Economic Reforms and Plant Heterogeneity

Several studies have found that plant turnover contributes to productivity growth. This evidence seems to be consistent with the idea that by reducing protection granted to inefficient firms, economic liberalization would generate productivity gains associated with resource reallocation from less productive to more productive firms. However, little empirical work has been done directly linking economic liberalization and plant exit. This article uses Chilean reforms to shed light on their effects on plant exit. Our econometric analysis shows that larger and more productive plants are less likely to exit. After controlling for these characteristics, we also find that exit is more likely in export-oriented industries. Moreover, we find a differential impact of economic liberalization and exchange rate fluctuations. Changes in these variables have a more significant impact on less productive and smaller plants. By industry, we find that more affected plants are those in export-oriented sectors. (c) 2010 by The University of Chicago. All rights reserved.