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

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FACTORS AFFECTING the EXIT of MICRO and SMALL ENTERPRISES (MSEs) in MARIKINA FOOTWEAR INDUSTRY Neill John G. Macuha Yolanda T. Garcia Paul Joseph B. Ramirez University of the Philippines Los Baños Outline
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FACTORS AFFECTING the EXIT of MICRO and SMALL ENTERPRISES (MSEs) in MARIKINA FOOTWEAR INDUSTRY Neill John G. Macuha Yolanda T. Garcia Paul Joseph B. Ramirez University of the Philippines Los Baños Outline of the presentation Introduction Problem Objectives Framework Methodology Analytical Framework Nature and Sources of Data Results and Discussion Conclusion Introduction The 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 footwearproducing 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 ; 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; β 0 = constant of the model that represents fixed cost; β 1, β 2, β 3 = beta parameters of the model; ε 0 = error term of the model. Methodology As stated, β 0 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; β i = beta parameters of the model from the total cost equation; i = subscripts 0, 1, 2, 3 respectively Methodology Consequently the AVC was computed below: ; Where = ratio of the total variable cost and quantity produced; AVC = average variable cost; Q = quantity produced; β i = 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; β i = 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 , 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 , 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 from REGISTERED FIRMS YEAR Source: Unpublished data from Marikina City s BPLO 2013 OLS Results Result Q Sq. Q Cu. Q 6.82*10-8 Constant 79, Adjusted R F-value (3, 36) 5.73 Prob F - DV = Total Cost 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/or 75% negative profits No more market/ low 63% demand Availability of skilled labor 40% Health issues of the manager 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 negative profits 70% High tax rates 50% No one will inherit the business 20% Logit Results Computed probabilities o exit at mean values Conclusions The 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. Conclusions The 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-
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