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



exit. This probably reflects that firms attracted by the increasing, but still relatively
recent presence of foreign companies, are typically quite dynamic. Once these
newcomers realise that it is far from easy to compete and obtain new technology, they
tend to switch and move on rather than close down.

Fourth, a high concentration ratio (CR) increases the probability that a firm switches
sector, but this result does not hold for firm exit decisions, where the parameters are
negative, but insignificant. It has in Vietnam been hypothesized that the former result
may be rooted in the observation that a variety of enterprises took steps to switch out of
highly concentrated sectors in anticipation of the Competition Law, approved in late
2004 (CIEM, 2006). Similarly, there is likely to be at least some enterprises which have
been attracted by high concentration ratios only to find after entry that conditions are
not as permissive as expected, be that due to collusion (as hypothesized in Section 2) or
unexpected competitive pressures more generally. On the other hand, if firms do
manage to get established and succeed in developing appropriate networks, which are
often essential in Vietnam, they tend to stay (corresponding to what was suggested in
Section 2), and in line with the observation that switching tends to be more likely than
exit.

Fifth, a high average sector efficiency level (EFF) tends to increase the probability of
sector switching and exit. This is as expected, and the fact that switching is more likely
than exit is in all likelihood due to the fact that the Vietnamese business environment
does contain - as suggested above - a number of firms which are willing to “try it out”
in search of opportunities, but which also move on, when opportunities do not
materialise.

Sixth, there is as expected a significantly lower probability of switching out from
sectors that are highly protected. Accordingly, firms tend to stay in these sectors,
reaping the benefits associated with protection. This is so even if the protection is
expected to be short lived as has been the case in Vietnam from 2001 to 2004. In
contrast, the insignificance on exit in column (1) suggests that when decisions on
whether to close down or remain in a sector are taken, a longer term perspective on firm
survival dominates. If it is clear that the firm is not sustainable, then better give up right

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