Download FACTORS AFFECTING the EXIT of MICRO and SMALL

FACTORS AFFECTING the EXIT
of MICRO and SMALL
ENTERPRISES (MSEs) in
MARIKINA FOOTWEAR
INDUSTRY
Neill John G. Macuha | Yolanda T. Garcia | Paul Joseph B. Ramirez
University of the Philippines Los Baños
Outline of the presentation
Introduction
Problem
Objectives
Framework
Methodology
Analytical Framework
Nature and Sources of Data
Results and Discussion
Conclusion
Introduction
The number of producers in the area
significantly diminished (Scott 2005).
From around 7,000 firms producing in the
1970s, only 130 shoe manufacturers remain
in Marikina City (Philippine Footwear
Federation Inc. n.d., cited in Office of
Senator Loren Legarda).
 The decline of the shoe industry has been
attributed to the influx of foreign produced
footwear in the domestic market.
Statement of the Problem
 The study will be answering the following
questions:
(1) What pushes the footwearproducing firms in Marikina City to exit
the industry?;
(2) How much impact does economic
indicators such as revenue and costs
affect the decision or probability of
the producers to stop producing?;
(3) Are there any non-economic
factors that may affect their decision
to stop producing?
Objectives of the Study
Generally, the study will be done to
identify the factors that affect the
firm exit decision of firms in the
Marikina Footwear Industry.
Objectives of the Study
Specifically, the study aims to:
describe the trend in the exit of micro
and small firms in Marikina Shoe
Industry for 2001-2013;
plot the cost curves of said firms in
order to determine their ave. shutdown
and break-even points .
examine the current status of the
micro and small shoe industry based
on the estimated values of the said
costs.
Objectives of the Study
Specifically, the study aims to:
determine the economic and
non-economic factors that affect
the decision of firms to continue or
stop producing Marikina-made
footwear;
recommend policy options that
will support micro and small
enterprises in the footwear industry
of the Philippines.
Shoe Production
Theoretical Framework
 Neoclassical thought states that the profit
maximizing condition is hereby given as the
point where the Marginal Cost (MC) of the
firm is the same as its Marginal Revenue
(MR). Furthermore, cost may be viewed as
a function of production. Mathematically
this could be written as:
C(q) = FC + VC (q);
 Furthermore, it says that there exist a
threshold of acceptable losses before a
firm exits the industry (Harada 2007). This
threshold is known as the shutdown point,
where the Marginal Cost (MC) curve
intersects the average cost curve.
Theoretical Framework
Methodology
 For this study, the logit model used were as
follows:
 Pr (exit = 1) = F (TR, TC, Size, Years, Sex, Age);
 Where: TR = total revenue of the firm per month;
TC = total cost of the firm per month;
Size = dummy variable on the size of the firm, if
small =1 and =0 if micro
Years = years of operation of a given firm;
Sex = dummy variable to reflect the gender of
the firm’s manager, if male = 1 and 0
otherwise;
Age = age of the firm’s manager in years;
Methodology
 This study assumed that the cubic cost function holds
true for MSEs in the Marikina Footwear Industry.
Ordinary Least Squares (OLS) regression was used in
order to identify the coefficients in the function; the
model used was:
;
 Where, TC = total cost of the firm per month;

Q = quantity of shoes produced by the firm per
month;

β0 = constant of the model that represents fixed
cost;

β1, β2, β3 = beta parameters of the model;

ε0 = error term of the model.
Methodology
As stated, β0 represents the fixed cost,
therefore, the remaining parts of the model
besides the error term is the total variable
cost. TVC is shown below:

Methodology
 From this, MC, AVC and AC can now be derived.
First the AC of the firms was derived as:
;

 Where
= ratio of the total cost and quantity
produced;

AC = average cost;

Q = quantity produced;

βi = beta parameters of the model from the
total cost equation;

i = subscripts 0, 1, 2, 3 respectively
Methodology
 Consequently the AVC was computed below:

 Where
;
= ratio of the total variable cost and
quantity produced;

AVC = average variable cost;

Q = quantity produced;

βi = beta parameters of the model from the
total cost equation;

i = subscripts 1, 2, 3 respectively;
Methodology
 Last, MC was:
3
2
;

 Where
= partial derivative of TC with
respect to Q;

MC = marginal cost;

Q = quantity produced;


βi = beta parameters of the model from
the total cost equation;
i = subscripts 1, 2, 3 respectively.
Nature and Sources of Data
 The study used primary data from a survey
done on both firms that still continues to
produce until present, and firms that already
exited the industry in Marikina City. The time
frame used was be from 2001-2013, where
from 237 registered footwear firms, it dropped
to around 161 producers at the present day
(Unpublished data from BPLO 2013).
Nature and Sources of Data
 Hence, from a population of 76 firms that
exited during 2001-2013, the study aimed to
source 60 respondents, where 30 were micro
firms, while the rest were small firms. However,
due to several difficulties, the study only
gathered 10 respondents, 5 small, 5 micro.
Nature and Sources of Data
 For those that were currently producing,
MaSIDC provided 47 firms that were
registered in the agency were qualified as
MSEs. The sample size interviewed for this
cluster were 40, among which 18 were small
firms while 22 were micro firms.
 In totality, the population combined for both
classification of continuous operations and
stopped production was 123. Furthermore,
the over-all sample size would be 50.
Shoe Production
Sample and firm
characteristics
#-Figures as of 2013
Annual number of footwear producing
firms in Marikina City from1992-2013
600
513 509
500
400
REGISTERED FIRMS
400
489
499
450
363
425
361
296 290
300
241
200
173
267
237
161
126 130 134
181
100
139
0
YEAR
Source: Unpublished data from Marikina City’s BPLO 2013
137
OLS Results
Variable@
Result
Q
72.2796
Sq. Q
-0.0033
Cu. Q
6.82*10-8
Constant
Adjusted R2
F-value (3, 36)
Prob>F
@ - DV = Total Cost
79,138.80
0.8462
5.73
0.0026
Total Cost Curve of the micro and
small industry in the Marikina Shoe
Industry
MC, AVC, AC curves
Intercepts and computed values of
price and quantity at important
points
^
- rounded to the nearest integer
Selected probable reasons to decide to
stop operations for firms still in the
market
Reason
Percentage
High tax rates
80%
Competition from overseas
78%
Decreasing
and/or
negative profits
No more market/ low
demand
Availability of skilled labor
75%
Health
issues
manager
25%
of
the
63%
40%
Actual reasons of firms already out
in the market to stop operations
Reason
Percentage
Competition from overseas
90%
No more market/ low demand
70%
Decreasing and/or negative
profits
70%
High tax rates
50%
No one will inherit the business
20%
Logit Results
Computed probabilities o exit
at mean values
Conclusions
The results showed that only
economic factors were the significant
factors that affected the decision
criterion of the owners of the micro
and small firms in the Marikina Shoe
Industry whether to continue or stop
their business operations.
On the other hand, non-economic
factors stated in the study produced
insignificant results, and was therefore
inconclusive of the results.
Conclusions
The over-all trend of the number of
firms operating was declining, even if
it shows a slowly recovering industry.
In general, the results of this study
prove that micro firms in Marikina
Footwear Industry are highly prone to
exit the industry, while small firms are
incurring losses, but are above the
shutdown point.
Shoe Production
Shoe Production
-FIN-