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

the relationship between efficiency and firm exit and sector switching. Explanatory
variables include firm specific factors such as age, size and form of legal ownership
along with sector-level indicators including different concentration ratios, sector
efficiency levels and rates of protection. We find clear evidence that conventional
wisdom needs to be revised. The positive productivity effect of firm turnover seems - at
least in the case of Vietnam - to be driven by sector switchers. Moreover, distinct
differences in the firm and sector-level determinants of firm switching and real exiting
emerge.

The paper is structured as follows. In Section 2, we rely on existing studies to identify
potential determinants of sector switching and exit, while Section 3 presents the
empirical approach. Section 4 describes the data, and empirical results are put forward
in Section 5. Section 6 concludes.

2. Explanatory variables

Bernard et al. (2006a) suggest that product switching is important for sector dynamics,
and highlight (using U.S. manufacturing data) that “product/industry/sector switching is
frequent, widespread and influential in determining both firm and aggregate
outcomes”.³ We ask whether this is also the case in Vietnam in what follows, and in
addition enquire whether differences exist between the decision to switch sectors, on the
one hand, and exit and entry decisions, on the other. Based on the literature, we propose
a number of firm and sector specific determinants of firm exit and sector switching
decisions. Considering firm specific explanations first, Bernard et al. (2006a) argue that
an extended version of standard sector dynamics models can be relied on in analysing
sector switching.

³ Bernard et al. (2006a) refer to 2-digit ISIC categories as sectors, 4-digit ISIC categories as industries
and 5-digit ISIC as products or goods. We follow their definition and focus on sector switching (2-digit
level), which may be considered a more conservative measure of switching behaviour. While the data
allow for analysis at the 4-digit level, which would significantly increase the number of switchers (at the
industry level), we have chosen to select the 2-digit ISIC level to make our study comparable to the wide
range of firm dynamic studies that use this level of disaggregation.

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