Understanding the Relationship Between Globalization and Survival of Philippine SMEs

This paper examines whether firms of heterogeneous size are affected differently by globalization. Are there differences in the survival of SMEs and large enterprises the higher their exposure to imports and lower tariffs? To do this, both tariffs and effective protection rates are used as globalization proxy variables and added to the factors that affect firm shutdowns consisting of firm characteristics such as age, size, productivity, capital intensity, ownership, export, and R&D. Government subsidy and price cost margins at the industry level are also included. To capture firm heterogeneity, firm size was interacted with tariffs and effective protection rates as well as with firm characteristics such as productivity, ownership and export. Using data on the Philippine manufacturing industry from 1996 to 2006, the results confirm previous research finding that firm size, age, and productivity are important determinants of firm exit. Controlling for these attributes, the results show that tariffs are negatively correlated with firm exit and the probability of exit is higher in small firms that face tariff reduction. Firm exit is greater for small enterprises characterized by low productivity, non-exporter and without foreign equity. Firms that have high level of productivity, engaged in export activities and have foreign equity are better able to survive.