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Economies 2018, 6(2), 26;

Shaking up the Firm Survival: Evidence from Yogyakarta (Indonesia)

Department of Economics, Atma Jaya Yogyakarta University, Jl. Babarsari No. 43, Yogyakarta 55283, Indonesia
Department of Spatial Economics, Vrije Universiteit Amsterdam, 1081 HV Amsterdam, The Netherlands
Department of Economics, Vrije Universiteit Amsterdam, 1081 HV Amsterdam, The Netherlands
Author to whom correspondence should be addressed.
Received: 30 November 2017 / Revised: 2 March 2018 / Accepted: 21 March 2018 / Published: 9 April 2018
(This article belongs to the Special Issue Natural Hazards and Economic Development)
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The survival of firms under changes in the business environment caused by exogenous shocks can be explained using economic Darwinism. Exogenous shocks can cause ‘cleansing effects’. Shocks clean out unproductive firms so that available resources are allocated to the remaining more productive firms. However, shocks may also force out young firms that have the potential to be highly productive in the future, which will lower the average productivity of industries. This is known as the ‘scarring effect’ of shocks. Therefore, the overall impact of exogenous shocks on the allocation of resources depends on the relative magnitude of cleansing and scarring effects. This paper investigates this natural selection mechanism after the Yogyakarta earthquake in 2006. The study uses data on medium-sized and large manufacturing firms in the Yogyakarta province collected by the Indonesian Statistical Agency. The main finding of this paper is that firms that had higher productivity prior to the earthquake in 2006 were more likely to survive after the earthquake, which suggests the existence of a natural selection mechanism, specifically cleansing effects. There is no evidence of the scarring effects of the earthquake on the new entrants. View Full-Text
Keywords: firm’s survival; exogenous shock; Yogyakarta earthquake; Indonesia firm’s survival; exogenous shock; Yogyakarta earthquake; Indonesia

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Brata, A.G.; De Groot, H.L.F.; Zant, W. Shaking up the Firm Survival: Evidence from Yogyakarta (Indonesia). Economies 2018, 6, 26.

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