Introduction

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This paper is one of the few that have studied the impact of exchange rate movements on plant survival. While there are several papers that analyze the impact of tariff reductions (Head and Ries 1999; Trefler 2004; Lileeva 2008), work on how exchange rate movements affect plant survival is limited. ¹  The paper provides empirical evidence on the simultaneous effect of tariff reduction and exchange rate movements on plant exit using Canadian plant-level panel data covering a period from 1979 to 1996, during which Canada experienced large exchange rate fluctuations and tariff reductions. We make use of Statistics Canada's Annual Survey of Manufacturers (ASM), which allows for a rich set of covariates with regard to nationality, export intensity, and industry characteristics. As a result, we are able to examine the heterogeneity of responses of different subgroups of plants to changing tariffs and exchange rates. The paper also looks at the problems associated with interactions in probit regression and offers correct interpretation of the effects of interaction terms between tariffs/exchange rates and producer characteristics.

Section 1 reviews a set of hypotheses regarding plant exit using a variety of models from the industrial-organization and international-trade literature. Section 2 introduces the data sources used herein and provides summary statistics. Section 3 outlines empirical specifications, and presents empirical results. Section 4 concludes.