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International trade, exit and entry: A cross-country and industry analysis

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Abstract

This paper examines the impact of globalisation, by means of growing international trade, on firm entry and exit at the industry level. The analysis is carried on the manufacturing industries of eight European countries, over the period 1997–2003. Our main findings suggest important entry-discouraging effects in the short run, following increased trade exposure. Using panel estimation techniques, the empirical evidence points to less creative replacement entry in industries characterised by substantial import intensity, and strong selection and higher entry barriers in industries characterised by higher openness through the export channel. The negative effects of trade openness are milder if the increasing trade exposure concerns intra-industry trade, coupled mainly with international sourcing of intermediates within the industry. The latter effects also show up in the model explaining the exit of firms, which we estimate jointly with entry.

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Notes

  1. NACE (Rev. 1.1) is the European classification of economic activities corresponding to ISIC (Rev. 3.1).

  2. Two industries have been excluded from the analysis: “manufacturing of coke, refined petroleum products and nuclear fuels” (DF) and “manufacturing n.e.c.” (DN). In the former case, the choice is due to the peculiar nature of the sector, whose industry dynamics are more likely to be related to legal changes and natural factors rather than trade. “Manufacturing n.e.c.” is instead a residual category for relatively heterogeneous activities (from the manufacturing of furniture to recycling), which would evidently raise problems in analysing the relation between industry-level trade openness and firm dynamics.

  3. Domestic production figures are available in the Eurostat Structural Business Statistics database.

  4. The EU KLEMS database is the outcome of a project financed by the European Commission for the analysis of productivity and growth. It has been produced by a consortium of 15 organisations across the EU, with support from Eurostat, OECD, the Groningen Growth and Development Centre and various national statistical institutes. More details are available on the EU KLEMS website: http://www.euklems.net/index.html.

  5. The methodology and variables are described in Timmer, van Moergastel, Stuivenwold, Ypma, O’Mahony, and Kangasniemi (2007).

  6. See the previous footnote for a methodological reference.

  7. We have employed as instruments the first and second lags of the number of firms, together with the second lags of average employment, average profitability and intra-industry trade, and the third lag of the change in export intensity in each industry–country pair. Data on the latter variables are provided by the EUROSTAT Comext and Structural Business Statistics Database. The average profitability index is computed as the ratio of gross operating surplus over turnover, at the industry–country level. The reported Hansen-J test for over-identifying restrictions always supports the validity of our instrumentation strategy. Moreover, the F-statistic at the first stage is always around 22, thus pointing to a good strength of the employed instruments.

  8. The choice of this threshold is motivated by the literature on relevant geographic markets (e.g., the Elzinga–Hogarty LIFO test; Elzinga & Hogarty, 1973).

  9. We have employed as instruments the second lags of average employment, number of firms, average profitability and capital/labour intensity, as well as the dummy Imp_Open and the country-specific value of GDP in the first year of the considered time-span. Capital/labour intensity is proxied by physical capital services per hour worked, as retrieved from the EU KLEMS database (see the third section for more details).

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Acknowledgements

This paper benefited from presentations at Pennsylvania State University, Erasmus University Rotterdam, the Max Planck Institute of Economics (Jena), the LICOS Centre for Institutions and Economic Performance (Leuven), and the 2008 AIB Conference in Milan. We thank Carlo Altomonte, Rosario Crinò, Joep Konings, Alessandro Olper, Damiaan Persyn, Joris Pinkse, Mark Roberts, James Tybout, Stijn Vanormelingen, Henisz Witold and two anonymous referees for useful comments. Colantone is grateful to the Economics Department of Penn State University, for their hospitality while working on this paper. Financial support from the Research Council of Leuven and the Flanders District of Creativity is also gratefully acknowledged.

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Authors and Affiliations

  1. Erasmus University Rotterdam and ERIM, Rotterdam, The Netherlands

    Italo Colantone

  2. Katholieke Universiteit Leuven and Vlerick Leuven Gent Management School, Leuven, Belgium

    Leo Sleuwaegen

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  1. Italo Colantone
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  2. Leo Sleuwaegen
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Accepted by Witold Henisz, Area Editor, 2 November 2009. This paper has been with the authors for three revisions.

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Colantone, I., Sleuwaegen, L. International trade, exit and entry: A cross-country and industry analysis. J Int Bus Stud 41, 1240–1257 (2010). https://doi.org/10.1057/jibs.2009.105

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