Firm structure and survival rates in U.S. manufacturing plants

¶ … Firm Structure, Multinationals, and Manufacturing Plant Deaths," from the Review of Economics and Statistics, over a typical five-year period, more than 30% of U.S. manufacturing plants shut down, accounting for more than 17% of manufacturing employment" (Bernard & Jensen 2007, p.193). Given the significant impact this has had on the U.S. economy, Andrew B. Bernard and J. Bradford Jensen attempt to explore the role of firm structure in plant shutdowns, which they feel has been insufficiently addressed in the current literature on plant death. Past literature has tended to emphasize individual plant characteristics rather than the parent organization of the plant. True, "if single-plant firms account[ed] for the bulk of employment and output in the U.S. economy or if plants owned by multiunits behave no differently from single units, the exclusion of firm characteristics" in previous studies "would be a minor oversight," however, this is not the case, given the prevalence of "multiunit and multinational firms" today (Bernard & Jensen 2007, p.193). Furthermore, multinational and multiunit plants exhibit different characteristics and have different access to resources than smaller plants, which makes the author's line of inquiry a worthy subject of study.

The author's data indicates that the probability of plant death is substantially reduced for plants that are part of a multiplant firm and "domestic plants owned by U.S. multinationals are far less likely to close than plants in purely domestic firms" (Bernard & Jensen 2007, p. 193). In particular, high productivity exporting plants are significantly less likely to die. "The export status of the plant reduces the probability of shutdown by as much as 15% even after accounting for plant size, productivity, factor intensity, and ownership structure" (Bernard & Jensen 2007, p.194). The authors provide some of the first direct evidence on the link between international investment and domestic labor market outcomes (Bernard & Jensen 2007, p.195). This is despite the fact that multinationals pay higher wages than non-multinationals (Bernard & Jensen 2007, p.194). The authors do not explore why this is the case, although it is possible that higher labor costs are sufficiently offset by the greater profits of the multinationals, or that U.S. multinationals are more likely to close smaller, poorer paying and performing plants.

Theory, principles of journal article

The article supports the classical, microeconomic theory of the superiority of economies of scale (McConnell, Brue, & McPherson, 2006). Large firms tend to have larger plants. Large plants are associated with characteristics that are associated with higher survival probabilities, and that fact alone should lead to lower death probabilities, for plants that are part of both multiplant and multinational firms. Plant attributes that increase survival tend to be present to a greater degree in larger firms, such as the fact that larger firms have more access to venture and lent capital that can help them avoid plant shutdown.

In the face of negative shocks such as a temporary drop in demand for one of their products a plant that is a multiunit or a multinational has increased flexibility to reduce production by closing a plant without exiting the market altogether (Bernard & Jensen 2007, p.196). Single-plant firms cannot cease production entirely and continue to remain solvent, especially if they produce a limited range of goods, for a more limited market.

Conclusion

One aspect of the additional support given by a multinational status to a firm that reduces plant death not explored by the article is that not only are multinationals larger, but they also have the luxury of a buffer market against swings in domestic demand -- goods can be shifted to a temporarily healthier economic sphere of the globe, and these firms also have additional access to foreign capital. The authors state that their article addresses a gap in the existing literature regarding plant deaths, and it is certainly important and valuable to explore the role of international status in plant survival. This is true because of the dominance of larger and later multinational enterprises in almost all of the nations of the world. Furthermore, the article has implications beyond the U.S., as if domestic U.S. plants find it difficult to compete with the resources of foreign corporate entities, no doubt this will prove an even greater struggle for enterprises in developing lands. Finally, the authors find that large U.S. multinationals are more willing to close 'bad' plants: "We also find strong evidence that ownership by a U.S. multinational significantly increases the shutdown probability of a domestic plant conditional on plant characteristics" (Bernard & Jensen 2007, p.202). Thus protectionism may not be a viable solution to prevent the encroachment of larger firms into an economy, as one of the signs of success of a firm is its ability to quickly close unproductive plants, and quickly shift capital and production materials elsewhere. Protectionism may simply prop up inefficient firms.