Firm performance and markets: survival analysis of medium and large manufacturing enterprises in Indonesia

Abstract

This study identifies the effect of firm performance, especially efficiency, on firm survival. This study applies efficiency calculations using a translog model based on both time-invariant and time-varying production functions and the Ackerberg–Caves–Frazer (ACF) model to overcome the endogeneity problem in the estimation of the production function. The data used are firm-level data, which are medium and large manufacturing company censuses with an observation period from 1995 to 2015. This study used two estimation techniques: the Cox proportional hazard model and Poisson regression. I estimate the Cox regression with firm-level data, whereas the Poisson regression is estimated with aggregate data for 2-digit ISIC. Estimates at the aggregate 2-digit ISIC level are intended to not only see the effect of efficiency on companies that survive but also on companies that enter and exit. Firm-level evidence shows that a company’s efficiency reduces the hazard ratio or increases its survival time. Moreover, consistent with firm-level results, the aggregate-level estimation shows that efficiency increases the chances of survival and entry of companies into Indonesia and reduces the rate of company exit from the Indonesian market. This shows that a company's level of technical efficiency makes an important contribution to the survival of manufacturing companies in Indonesia.