The reorganization decisions of troubled firms: exit, downscale or relocate
Poorly performing firms need to improve their profitability through restructuring their operations. In many cases this means downsizing by means of collective layoff of employees. Based on a unique sample of Belgian firms reporting collective layoffs this paper analyzes whether a firm dismisses all employees (exit), a significant proportion of its employees (downscaling), or closes down part of its activities and moves production abroad (international relocation). It is argued and demonstrated that the choice of downsizing approach differs depending on the strategic options and characteristics of the firm. We find that firms that downscale are more sensitive to profit changes. Relocating firms are labor intensive and move production to lower wage countries to operate more capital-intensive in Belgium in line with the comparative advantage of the country. Exiting firms are typically small and young underscoring the theory on evolutionary learning.
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