Low-cost import competition and firm exit: evidence from the EU

Abstract

This article investigates the impact of import competition on firm exit from the manufacturing industries of eight European Union countries. A distinction is made between imports originating from low-cost countries and other imports. While the exit of small firms is high and small firms react strongly to import competition originating from other advanced countries, their exit is not found to be directly affected by imports from low-cost countries. Conversely, the exit rate of larger firms is much smaller in magnitude, but their exit is systematically and positively related to growing imports from low-cost countries. Such empirical evidence is consistent with small and larger firms making up different strategic groups within the same industries, where they face foreign competition of a different nature.