Sector Switching: An Unexplored Dimension of Firm Dynamics in Developing Countries



This also corresponds with the widespread (but empirically not verified) impression in
Vietnam that some firms are looking to switch as a survival strategy since they are
performing poorly at present, while others switch because they are (dynamic and
forward looking) firms in search of higher profits elsewhere.

[TABLE 9 ABOUT HERE]

Table 10 summarizes results from the same underlying probit model using different sub-
samples.29 Column (1) compares sector switchers with incumbent firms only, whereas
column (2) is restricted to a comparison between exits and incumbents. These sub-
samples yield the same conclusions as the full-sample, noting especially that sector
switchers are not significantly less efficient than incumbents. In column (3) in Table 10
we restrict the sample under consideration to sector switchers and exits only, and there
is no evidence of a significant efficiency difference between exits and sector switchers,
even when controlling for size, age, location, sector and ownership form. However,
sector switchers tend to be larger, younger and with foreign participation than firms
closing down production. In addition, exit firms are more often found among SOEs,
which is again as expected given the nature of the reform process in Vietnam.

[TABLE 10 ABOUT HERE]

Table 11 presents the results of the sector switching and exit models incorporating our
set of five sector-level determinants alongside the firm specific variables just discussed.
Column (1) and column (3) (with province dummies) use the total sample, whereas
column (2) and column (4) (with province dummies) are comparable with column (3)
in Table 9 (comparing switchers and exits only).

The first and most important observation from Table 11 is that sector level determinants
are clearly of critical importance in both switching and exit decisions. Most sector-level
variables are highly significant in both columns (1)-(2) and (3)-(4), and the size of the
estimated probabilities are in some cases quite noticeable, especially in the switching

29 In Table E of the Appendix we analyse differences between firms changing main production to the
tertiary/service sector and intra-manufacturing sector switchers. We do not find differences in efficiency
levels (when controlling for size and age). However, among sector switchers the firms that change to
services are smaller in size compared to firms switching within manufacturing. Moreover, foreign firms
tend to stay within the manufacturing sector.

20



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