Shaking up the firm survival: Evidence from Yogyakarta (Indonesia)

Aloysius Gunadi Brata*, Henri L.F. De Groot, Wouter Zant

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

The survival of firms under changes in the business environment caused by exogenous shocks can be explained using economic Darwinism. Exogenous shocks can cause 'cleansing effects'. 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 have the potential to be 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, specifically cleansing effects. There is no evidence of the scarring effects of the earthquake on the new entrants.

Original languageEnglish
Article number26
Pages (from-to)1-14
Number of pages14
JournalEconomies
Volume6
Issue number2
DOIs
Publication statusPublished - 1 Jun 2018

Funding

Acknowledgments: We thank the anonymous reviewers of this journal for their valuable comments. Brata acknowledges a scholarship from the Indonesian Directorate General of Higher Education. The usual disclaimer applies.

FundersFunder number
Indonesian Directorate General of Higher Education
Direktorat Jenderal Pendidikan Tinggi

    Keywords

    • Exogenous shock
    • Firm's survival
    • Indonesia
    • Yogyakarta earthquake

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