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Death of Canadian Manufacturing Plants: Heterogeneous Responses to Changes in Tariffs and Real Exchange Rates

Author

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  • Baldwin, John R.
  • Yan, Beiling

Abstract

We examine the simultaneous effects of real-exchange-rate movements and of tariff reductions on plant death in Canadian manufacturing industries between 1979 and 1996. We find that both currency appreciation and tariff cuts increase the probability of plant death, but that tariff reductions have a much greater effect. Consistent with the implications of recent international-trade models involving heterogeneous firms, we further find that the effect of exchange-rate movements and tariff cuts on exit are heterogeneous across plants - particularly pronounced among least efficient plants. Our results reveal multi-dimensional heterogeneity that current models featuring one-dimensional heterogeneity (efficiency differences among plants) cannot fully explain. There are significant and substantial differences between exporters and non-exporters, and between domestic- and foreign- controlled plants. Exporters and foreign-owned plants have much lower failure rates; however, their survival is more sensitive to changes in tariffs and real exchange rates, whether differences in their efficiency levels are controlled or not.

Suggested Citation

  • Baldwin, John R. & Yan, Beiling, 2010. "Death of Canadian Manufacturing Plants: Heterogeneous Responses to Changes in Tariffs and Real Exchange Rates," Economic Analysis (EA) Research Paper Series 2010061e, Statistics Canada, Analytical Studies Branch.
  • Handle: RePEc:stc:stcp5e:2010061e
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    Cited by:

    1. Pehr-Johan Norbäck & Ayça Tekin-Koru & Andreas Waldkirch, 2015. "Multinational Firms and Plant Divestiture," Review of International Economics, Wiley Blackwell, vol. 23(5), pages 811-845, November.

    More about this item

    Keywords

    Business adaptation and adjustment; Business performance and ownership; Entry; exit; mergers and growth; Manufacturing;

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