FACTORS AFFECTING the EXIT of MICRO and SMALL ENTERPRISES (MSEs) in MARIKINA FOOTWEAR

INDUSTRYNeill John G. Macuha | Yolanda T. Garcia | Paul Joseph B. Ramirez

University of the Philippines Los Baños

Outline of the presentation

IntroductionProblemObjectivesFramework

MethodologyAnalytical FrameworkNature and Sources of Data

Results and DiscussionConclusion

IntroductionThe 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 footwear-

producing 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

MethodologyConsequently 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

Source: Unpublished data from Marikina City’s BPLO 2013

400

425

513 509489 499

450

363361

237

296 290

267

241

181

173

139137

126 130 134161

0

100

200

300

400

500

600

REG

ISTE

RED

FIR

MS

YEAR

OLS Results

@ - DV = Total Cost

Variable@ Result

Q 72.2796

Sq. Q -0.0033

Cu. Q 6.82*10-8

Constant 79,138.80

Adjusted R2 0.8462

F-value (3, 36) 5.73

Prob>F 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/ornegative profits

75%

No more market/ lowdemand

63%

Availability of skilled labor 40%

Health issues of themanager

25%

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 negativeprofits

70%

High tax rates 50%

No one will inherit the business 20%

Logit Results

Computed probabilities o exit at mean values

ConclusionsThe 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.

ConclusionsThe 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-