Entry-exit and productivity change: An empirical analysis of efficiency frontiers.

Abstract

Do competitive pressures really force inefficient producers to shut down? Do entrants typically increase or worsen industry-wide efficiency? Is there evidence of systematic learning processes, and if yes, do these processes differ across plant cohorts? How do plant turnover effects combine to shape rates of overall industrial productivity growth? The thesis applies the recent econometric techniques to address these unexplored questions. Specifically, plant-specific time-variant technical efficiency indices are constructed for surviving, exiting, and entering plant cohorts, respectively. These are then used to compare productivity growth rates across plant-cohorts, and to examine the net effect of plant turnover and learning patterns on manufacturing-wide productivity growth. The analysis is based on plant-level panel data with all Chilean manufacturing plants with at least 10 workers, covering eight post-reform adjustment years 1979-86. The evidence supports the hypothesis that competitive pressures force less efficient producers to fail more frequently than others. Technical efficiency levels are higher among incumbents and entrants than among exiting plants. The productivity differences across cohorts are both systematic and persistent over time. The gap in productivity between incumbents and exiting plants, and between entrants and exiting plants has widened over time; while the gap between incumbents and entrants has shrunken over time. This is because exiting plants have declining productivity over time, while entrants plants gradually speed up their productivity growth. Moreover, competitive pressures have driven both incumbents and entrants to improve their productivity. The ratio of skilled labor to unskilled labor is higher and increasing more rapidly among incumbents and entrants than among exiting plants, providing an important source of learning and productivity growth. Although the 1982-83 recession affected the productivity of each cohort in different degrees, productivity steadily increased over the sample period, reflecting both the replacement of inefficient producers by efficient ones and the improvement of productivity by incumbents and entrants. These findings, insensitive to correcting for measurement errors and for selectivity bias, suggest that the basic patterns are robust and that the sweeping microeconomic reforms to liberalize the Chilean economy have been effective in promoting efficiency improvements in the manufacturing sector.