Impact of the Closure of Large Establishments on Regional Productivity

This paper investigates the impact of the exit of regionally dominant establishments on the productivity of the remaining local firms. Using establishment-level data from the Japanese manufacturing sector, we estimate the net effect of these exits through a difference-in-differences analysis, focusing on the top 1% of establishments that exited between 1999 and 2010. Our findings indicate a significant negative effect on regional productivity: exits reduced the productivity of the remaining establishments by about 1% within five years post-exit and by 0.7-0.8% within ten years. However, most of these declines can be attributed to the decreased demand associated with exits. Controlling for the factor of change in demand associated with exits, the exits themselves have little impact on total factor productivity (TFP) in either the short or long term. These results suggest that the legacy of large establishments in improving local TFP largely persists even after their exit.