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



higher amongst exiting firms compared with entrants once the sector switchers are
netted out. This actually suggests - in contrast with perceived wisdom - that the
aggregate turnover effect of “real” exit and entry of firms in the Vietnamese
manufacturing sector may impact negatively on overall productivity. Moreover, the
contribution of firm turnover to productivity growth appears more associated with firm
switching than with traditional interpretations of productivity differentials between
broadly defined categories of entry and exit firms, which merit more precise definition.

Secondly, our analysis brought out that there are in addition to productivity differentials
other distinct and statistically significant differences between the determinants of firm
switching and firm exit. At firm specific level, younger firms are for example more
likely to switch sectors while exit is significantly associated with state ownership. Firm
size is negatively associated with both switching and exit, but appears much more
important in the exit decision. Differences also exist among SOEs and foreign owned
firms in the exit decision. SOEs have been more likely to exit, while the opposite is true
for foreign firms.

Sector level characteristics tend to play a more influential role in switching than in exit
decisions, and the direction of impact also differs. For example, our sector level
measures of competition and efficiency matter differently for firms that switch sector
compared to those that exit. The former are influenced by the competitiveness of the
sector they are in as measured through its concentration ratio, the average efficiency
level and the extent of protection that the sector offers. In contrast, of these factors only
the efficiency level comes across as critical in the exit decision.

The insight that sector level determinants are particularly influential in switching
decisions is potentially very important. As noted, our first finding was that switching
appears to be at the core of the contribution of firm turnover to growth. Moreover,
sector level determinants are (alongside ownership characteristics) arguably much more
directly amenable to policy influence than firm level characteristics such as firm age,
size and relative firm-level efficiency.

A key issue for the Vietnamese manufacturing sector in the coming years is how trade
liberalisation will impact on productivity and profitability. Much of the literature

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