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

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

by

Carol Newman¹, John Rand² and Finn Tarp²

Abstract

Much of the literature on industry evolution has found firm dynamics to be an important
source of sector-level productivity growth. In this paper, we ask whether the delineation
of entry and exit firms matters in assessing the impact of firm turnover. Using detailed
firm level data from Vietnam, it emerges that efficiency differences between sector
switchers and exit/entry firms exist. Distinguishing between switchers and firm
entry/exit is crucial for understanding the contribution of firm turnover to overall
productivity growth. Moreover, we uncover distinct and illuminating firm and sector-
level determinants of firm exit and switching, which need to be carefully considered in
the search for effective policy.

Key Words: Firm dynamics, sector switching, efficiency, Vietnam

JEL Codes: D21, L6, O14

¹ Department of Economics, Trinity College Dublin, Ireland

² Department of Economics, University of Copenhagen, Denmark

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