The effect of foreign-owned large plant closures on nearby firms

Abstract

I estimate the impact of foreign - owned large plant closures on local firms. I identify 41 such events in Hungary and assign comparable control cities with foreign - owned large plants operating in the same industry and not closing. I use a firm - level panel database of Hungarian firms between 1992 and 2012. I do a difference - in - differences estimation compari ng outcomes of firms in the treated and control areas, before and after the plant closure. I find that after the foreign - owned large plant closures sales of nearby firms decreased by 6 percentage points and employment decreased by 3 percentage points on av erage. Firms operating in local services were hurt even more, suggesting that reduced local purchasing power due to the layoffs is a significant channel of the local plant closure effect. Firms operating in the supplier industry of the closing plant also d ecreased employment more than average, suggesting that input - output linkages play an important role in the propagation of negative shocks. In contrast, firms in the industry of the closing plant increased their employment, suggesting that they could benefi t from the increased local labor supply. I also find that low - productivity firms were hurt more by the plant closures than high - productivity firms