Globalization and Firm Exit: Differences Between Small and Large Firms

The effects of increasing import competition on the exit of heterogeneous domestic fi?rms are investigated, both at the theoretical and empirical level. Within the context of an oligopolistic rivalry model, marginal cost fl?exibility and product differentiation with respect to the imported goods are shown to lower the displacement effect from international competition, thus helping fi?rms to survive. Both results point to small fi?rms as being in a relatively favourable position with respect to their larger competitors, as industries adjust to increasing import penetration. These ?findings are consistent with empirical evidence on fi?rm exit for 12 manufacturing sectors in 8 European countries, from 1997 to 2003. In particular, the exit of large fi?rms is found to be sensitive to the shock of soaring import penetration from low-wage countries. Small fi?rms in the same industries are instead only affected by marginal trade integration with respect to neighbouring EU countries and other relatively wealthy trading partners. Hence this paper shows, for the ?first time, that fi?rms of different size might be affected differently by diverse sources of import competition. Implications on fi?rm strategic planning and public policy are discussed.