Plant Survival, Market Fundamentals and Trade Liberalization ∗

Abstract

Plant turnover increases aggregate productivity when efficient producers are more likely to survive. Given high entry and exit rates and the potential importance of net entry in accounting for aggregate productivity, in this paper we examine the determinants of plant exits and then examine how exits and other forms of output reallocation contribute to aggregate productivity. Using a unique plant-level longitudinal dataset for Colombia for the period 1982-1998, we examine the role of productivity and demand as well as input costs in determining plant survival. Moreover, given the important market-oriented reforms in Colombia during the early 1990s, we explore whether and how plant survival changed in response to trade liberalization. Our data permit measurement of plant-level quantities and prices, which allow us to decompose productivity and demand shocks, and in turn to estimate the effects of these fundamentals on plant survival. We find that higher productivity, higher demand and lower input prices increase the probability of plant survival. We also find that trade liberalization increased plant exit, while other reforms decreased plant exit. Moreover, trade liberalization makes high demand more important in determining survival, possibly because non-exporting low demand plants were unlikely to be exposed to competition prior to trade opening. By contrast, other reforms increase the importance of physical efficiency in determining survival, possibly because improvements in financial intermediation and increased factor adjustments enable reallocation towards promising projects, making efficient plants more likely to remain in the market.

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