There are considerable theoretical and empirical works of literature in favor of the benefits of international trade on firms’ survival prospects from various perspectives. This, in turn, provides a rationale for various countries’ government for intervention to help firms develop their exporting activities in a way to enjoy better productivity and survival prospects. That is, yet, while a number of studies have analyzed the direct effects of internationalization on productivity, relatively few have focused on its indirect effects through entry and exit. This paper tries to analyze the two reasons why export participation may benefit and improve the survival probability of firms: First, sales in both foreign and home markets may help firms diversify and reduce risks in the presence of a negative demand shock in domestic markets as explained by Wagner (2013). Second, the higher productivity and profitability of exporters, which then contribute to overall productivity growth through various channels. These include the entry of higher productivity exporters; existing exporters becoming more productive over time and/or intra-industry resources are reallocated to higher productivity exporters; and the shutdown of lower productivity firms – especially non-exporters with the least efficient levels as predicted by some recent heterogeneous firm trade models (A. B. Bernard, Eaton, Jensen, & Kortum, 2003; Melitz, 2003). However, in some sense export markets represent an additional source of uncertainty for the firm, which makes sales more susceptible to international demand shocks and thus exporting may not always necessarily be attached with higher survival rates. Thus, the overall impact of exporting activity on firm survival can be regarded as unclear. Similarly, financial health has been found to play an increasingly important role in the ability to grow and stay in the market (see (Bunn & Redwood, 2003; Clementi & Hopenhayn, 2006; Musso & Schiavo, 2008; Zingales, 1998)). In many developing countries, where financial markets are not well developed, access to finance is often identified by firms as a major obstacle to their operation (Kuntchev, Ramalho, Rodríguez-Meza, & Yang, 2012) although its effects on firm survival have been largely neglected in the literature.
The paper engages with two streams of the international trade literature by analyzing the joint effects of global engagement and financial variables on firm survival probabilities. The first stream focuses on the studies that investigate whether being an exporter affects firms’ survival probabilities where the evidence often varies greatly across different contexts and only starting to emerge. Some scholars indicate a positive and precisely determined effect of export participation in the fate of firms as it can also help to acquire (external) knowledge through participating in export markets: for instance; (A. Bernard & Jensen, 2005; A. B. Bernard & Jensen, 1999b; A. B. Bernard & Wagner, 1997) for US; (Baldwin & Yan, 2011; Bosco Sabuhoro, Larue, & Gervais, 2006) for Canada; (Hölzl, 2005) for Austria; (Pérez, Llopis, & Llopis, 2004) for Spain; (Kimura & Fujii, 2003) for Japan and (Alvarez & Vergara, 2013) for Chile. In contrast, some other studies didn’t find or found a negative linkage between export participation and the firm survival (for example, (Giovannetti, Ricchiuti, & Velucchi, 2011) for Italy; (Wagner, 2013) in Germany; (Vartia, 2004) for Finland; (Shiferaw, 2006) for Ethiopia; (Álvarez Espinoza & Görg, 2005; López, 2006) for Chile). Consequently, it is hard to make generalized inferences. Besides, it should be noted that all the above research has focused on a dummy variable with the value 1 if firms export and 0 otherwise to deal with the relationship between firm survival and export participation. While recent studies consider the relationship between firm survival and exporting status at different stages (exiting exports, beginning exports, and continuing exports). For instance: Görg and Spaliara (2014) for UK & France; Harris and Li (2010) for the UK and Vu and Lim (2013) for Vietnam reveal that continuing exporters enjoy a higher probability of survival while firms exiting exports suffer from a lower probability of survival than non-exporters. These results are robust to different specifications and estimations.
A second relevant stream of the literature is the studies that investigate the relationship between financial aspects and firm survival. A vast literature has concentrated on the effects of financial variables on various aspects of firm behavior such as investment, employment, and research and development activities (Bond & Van Reenen, 2007). However, there is scant empirical evidence on how financial variables affect firm survival, particularly in Sub-Saharan Africa. Among these, Zingales (1998) for US; Bridges and Guariglia (2008) for the UK and Fotopoulos and Louri (2000) for Greece reveal firms’ debt to assets ratios have a significantly negative effect on their survival probabilities; while the last one also found the ratios of tangible assets to total assets and profitability enhances firms’ survival probabilities. Similar evidence has also been produced for other industries and countries, see, for example, Bunn and Redwood (2003) for UK manufacturing and services industries; Musso and Schiavo (2008) for French manufacturing firms; Geroski and Gregg (1997) and Vartia (2004) for Finland firms. These findings are consistent with the view that serving relatively high debt (financial distress) is an obstruction for the operation of existing firms leading to potential exit and that relatively high amount of fixed assets indicates a higher commitment by a firm. Further, using data for UK and France firms, Görg and Spaliara (2014) also found that the impact of access to finance on firm survival indeed differs depending on a firm’s export status and accordingly they shows export starters and exiters experience much stronger adverse effects of financial constraints on their survival prospects while the likelihood of failure of continuers and switchers is less affected by financial variables. Lastly, from developing country context the only study is by NKURUNZIZA (2005) for Kenya and has found that the burden of past loans precipitated firm failure in the 1990s, but overdrafts did not seem to have had a significant impact on firm failure.
What is less well researched is the interplay between financial constraints (lack of access to external finance) and export on the one hand and survival on the other. Besides, knowing firm dynamics in terms of finance, export and survival would go a long way in explaining the evolution and competitiveness of manufacturing industries. Although some empirical studies have looked at the effect of export participation and financial constraints on firm survival separately, these studies utterly focused on developed countries except a study by NKURUNZIZA (2005) for Kenya. Yet, while global engagement can shield firms from liquidity constraints, none have considered the combined effect of export status and financial constraints on firm closure in Ethiopia context. Moreover, empirical investigations have not yet taken into account the effect of the export modes on firm survival alongside with their need of external finance, perhaps due to data limitations relating to export modes. To the best of our knowledge, the only study that does examine the possible relationship between exporting, financial health and firm survival is Bridges and Guariglia (2008) for UK firms and Görg and Spaliara (2014) for British & France. They looked at the impact of financial and global engagement variables and their combined effect on firms’ survival probabilities by estimating with various model specifications.
In particular, we tried to exploit the three aspects of firm dynamics to examine how they interplay in Ethiopian manufacturing firms where the country has implemented reforms since the mid-1980s by deregulation and liberalization to allow private sector plays a leading role. Thus, the empirical results from this study will broaden our empirical insight into what policies and strategies should be pursued to improve firm survival. It may have potential policy implications beyond the academic interest since firm dynamics, and the associated reallocation patterns, have moved center stage recently in the theoretical and empirical international economics literature. Besides, since each aspect of firm dynamics involves a decision-making process, it is very important to understand factors that determine the firm’s risk of closure to evaluate the efficiency of export-related policies and financial institutions. In other words, identifying the determinants of firm dynamics in terms of exit or survival is particularly important for countries in Sub-Saharan Africa, where dysfunctional markets are believed to have stifled the entry and growth of small enterprises while tolerating inefficient large incumbents (Collier & Gunning, 1999). We also managed to distinguish between the simple and detail exporters effects on survival. In other words, we do not only have concerned with exporting per se, but rather dig deeper and split firms into export starters, exiters, switchers, continuous exporters and continuous non-exporters. We find that while both financial variables and foreign trade significantly affect survival probabilities, firms with different export status exhibit a various sensitivity of their survival probabilities to financial variables.
Thus, this study is the first to consider such a linkage in a developing economy context where empirical evidence in this regard is exceptionally meager even in the developed one. Accordingly, this paper will make a contribution by providing the first hazard estimates to deal with the combined effect of global engagement and financial variables on survival probabilities for a Sub-Saharan African country using a census-based panel data. A study by Shiferaw (2006), which models firm dynamics in terms of entry, survival, and growth of Ethiopian manufacturing over the period 1996-2002, has estimated hazard model by the exit and survival as discrete choice variables. However, it differs from ours in two aspects, firstly, the two paper models two different factors in which our paper involves additional determinant of firm survival (that is, financial constraints) and also the effect of export status at various stages. Secondly, the period of observation and a sample of firms being used are different where ours cover a richer dataset from 2000-11 and covering all export-oriented sectors instead of all sectors. Moreover, although hazard models have become popular in the analysis of spells of unemployment, their application to the analysis of firm resilience in developing economies is still very limited.
The rest of the paper is organized as follows. Section 2 describes the data, introduce the variables to be used in the econometric analysis and provide some descriptive statistics while section 3 presents the econometric methodology. Section 4 and the final section discussed the estimation results and summarize the main findings respectively.