Shaking Up the Firm Survival: Evidence from Yogyakarta (Indonesia)

Tinbergen Institute Discussion Paper 2018-021/VIII

23 Pages Posted: 12 Mar 2018

See all articles by Aloysius Gunadi Brata

Aloysius Gunadi Brata

Atma Jaya University Yogyakarta; Independent

Henri L. F. de Groot

VU University Amsterdam - Department of Spatial Economics; Tinbergen Institute

Wouter Zant

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute

Date Written: March 7, 2018

Abstract

The survival of firms under changes in the business environment caused by exogenous shocks may be explained using economic Darwinism. Exogenous shocks can cause ‘cleansing effects’ as shocks clean out unproductive firms so that available resources are allocated to the remaining more productive firms. However, shocks may also force out young firms that are potentially highly productive in the future, which will lower the average productivity of industries. This is known as the ‘scarring effect’ of shocks. Therefore, the overall impact of exogenous shocks on the allocation of resources depends on the relative magnitude of cleansing and scarring effects. This paper investigates this natural selection mechanism after the Yogyakarta earthquake in 2006. The study uses data on medium-sized and large manufacturing firms in the Yogyakarta province collected by the Indonesian Statistical Agency. The main finding of this paper is that firms that had higher productivity prior to the earthquake in 2006 were more likely to survive after the earthquake, which suggests the existence of a natural selection mechanism causing cleansing effects. There is no evidence of scarring effects of the earthquake on the new entrants.

Keywords: firm’s survival, exogenous shock, Yogyakarta earthquake, Indonesia

JEL Classification: D22, Q54, R11

Suggested Citation

Brata, Aloysius Gunadi and de Groot, Henri L.F. and Zant, Wouter, Shaking Up the Firm Survival: Evidence from Yogyakarta (Indonesia) (March 7, 2018). Tinbergen Institute Discussion Paper 2018-021/VIII, Available at SSRN: https://ssrn.com/abstract=3135788 or http://dx.doi.org/10.2139/ssrn.3135788

Aloysius Gunadi Brata (Contact Author)

Atma Jaya University Yogyakarta ( email )

Jl Babarsari 44
Yogyakarta, DI Yogyakarta 55281
Indonesia

HOME PAGE: http://www.uajy.ac.id

Independent ( email )

Henri L.F. De Groot

VU University Amsterdam - Department of Spatial Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31 20 598 6168 (Phone)
+31 20 598 6004 (Fax)

Tinbergen Institute

Gustav Mahlerplein 17
Amsterdam, 1082 MS
Netherlands

Wouter Zant

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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