Loretta Fung

Firm Survival, Performance, and the Exchange Rate

This paper examines the impact of exchange rate movements on firm survival and sales. We exploit detailed Canadian firm-level data from 1986 to 1997, a period in which the Canadian dollar appreciated approximately 30% in the first six years and depreciated 30% in the later six years. We find that survival and sales are negatively associated with appreciations in the Canadian dollar. The impact on survival is less pronounced for more productive firms. The magnitude of the impact of exchange rate changes on firm survival and sales was comparable to the effect of CUSFTA-mandated tariff changes.

Are Service Firms Affected By Exchange Rate Movements

There is a growing literature addressing the effects of exchange rate movements on manufacturing firms, but almost no analysis concerning firms in the service sector. We analyze the effects of industry specific real exchange rate movements on the profitability, survival, and sales of Canadian service sector firms. Using rich firm-level data and service trade data, our empirical results show that real appreciations of the Canadian dollar reduce firm probability of survival, sales, and profitability while depreciations have the opposite effect. Overall, our findings suggest a significant exchange rate effect on service firms that is qualitatively similar to that found for manufacturing firms. However, the magnitude of the exchange rate effects is quite different for manufacturing and service firms. The impact of the exchange rate on profits is larger for manufacturing firms; the impact on survival is larger among service sector firms; and the impact on sales is of similar magnitude.

Plant Scale and Exchange‐Rate‐Induced Productivity Growth

This paper examines the impact of exchange rate movements on firm‐level productivity through changes in the scale of production. We employ plant‐level data to examine whether, and in what direction, exchange rate movements affect the scale of production, and how these changes in scale influence productivity. The paper finds that a real appreciation of the domestic currency reduces shipments and this negative effect is larger for exporters (both domestic and foreign owned). The paper also finds evidence that the appreciation‐induced reduction of scale negatively affects productivity at the plant level. This scale effect more than offsets any potential gains from the appreciation‐induced reduction in the price of imported inputs.

Firm Dynamics in Retail Trade: The Response of Canadian Retailers to Exchange Rate Shocks

We use comprehensive firm‐level data to estimate the responses of heterogeneous Canadian retail firms to real exchange rate movements. Our analysis focuses on a period characterized by large fluctuations in the Canadian dollar, providing an opportunity to quantify both intensive and extensive margin responses in retail industries to real exchange rate shocks and to examine how those responses differ across firms, locations, and sub‐industries. Our results indicate that a real Canadian currency appreciation significantly reduces a retailers sales, employment, and profits. The strength of this negative effect is decreasing in the distance of a retailer from the US‐Canada border. We do not find evidence of a strong relationship between real exchange rate movements and the number of operating firms nor the probability of firm survival. These findings are consistent with the view that a real Canadian dollar appreciation increases cross‐border shopping by Canadians, resulting in a negative demand shock for Canadian retailers, and the dominant response by firms to such a shock is through the intensive margin.

Exchange Rate Movements and the Distribution of Productivity

This paper examines how movements in the real exchange rate affect the distribution of labor productivity within industries. Appreciations of the local currency expose domestic plants to more competition as export opportunities shrink and import competition intensifies. As a result, smaller less productive plants are forced from the market, which truncates the lower end of the productivity distribution, and surviving plants face a reduction in physical sales (unless they adjust their mark-up), which, in the presence of scale economies, can lower productivity. Using quantile regression, we find that movements in the exchange rate do, indeed, have distributional effects on productivity.

Multinational Location Decisions and the Access to Imported Inputs

Although the influence of agglomeration economies on foreign direct investment location decisions is widely recognized in the literature, the nature of positive externalities is less well understood. This paper examines a particular source, access to specialized imported inputs, by applying a conditional logit model to the location decisions of Taiwanese multinationals in China. Our evidence, based on the 2,918 foreign direct investment projects approved between 1994 to 2006 in conjunction with Chinese customs data, reveals a positive effect of access to imported intermediate inputs and capital goods on the average investment, with effects that vary by industry group, time period and investment stage.