Surviving Trade Liberalization in Philippine Manufacturing

Firm entry and exit play a crucial role in spurring a reallocation of resources across firms as tariffs are reduced. In the light of the substantial trade reforms implemented in the Philippines over the last two decades, the paper examines the impact of trade reforms on the exit of domestic firms controlling for firm characteristics that may affect firm death likelihood. The results provide some evidence that tariffs have a highly significant negative impact on firm exit suggesting that trade liberalization increases the probability of exit of a given firm. These effects are, however, mitigated by the characteristics of individual firms, particularly by productivity. Firms with high productivity are more likely to survive as tariffs are reduced. This seems to be consistent with Melitz` (2003) finding that trade liberalization induces the exit of less productive firms.As the results show, exposure to trade forces the least efficient firms out of the industry. The results also show that apart from high productivity, other individual firm characteristics matter with larger, older, foreign-affiliated, and export-oriented firms having a lower probability of exit. These indicate that in designing adjustment policies toward a more open trade regime, it is necessary to understand not only the process or mechanism of interfirm reallocations taking place in the face of declining tariffs but also the factors hindering this process.