Firms' responses to shocks and the impacts on employment and investment
Creators: name: Kadam Ardiyono, Sulistiyo
Publisher: name: The Australian National University
Year: 2024

description: As a nation develops economically and integrates into the global market, both domestic and foreign shocks can significantly impact the well-being of its population. Understanding how these shocks spread through the economy and affect people's welfare is essential for effective mitigation strategies. Hence, detailed data granularity is crucial for comprehending the diverse channels and mechanisms through which shocks propagate. Fiscal and monetary authorities worldwide have emphasised the need for granular data, employing targeted interventions to address crises such as the Global Financial Crisis (GFC) and the Covid-19 pandemic. This study investigates how firms respond to different shocks and their subsequent effects on employment and investment. By examining firm-level observations from Indonesia and ASEAN-5 countries, this research fills a crucial gap in the existing literature by specifically focusing on developing countries. We hypothesise that firms' responses to shocks vary depending on the type of shock, their capabilities, and the policy environment. The study consists of five chapters, starting with an introduction and concluding with Chapter 5. In Chapter 2, we analyse the impact of foreign demand shocks on firms' input demand and domestic sales using comprehensive firm-level data from Indonesia during 2008-2010, following the GFC. Our findings show that firms adjust their input composition in response to foreign shocks, with variations based on input types, firm sizes, and economic trends. Larger firms exhibit higher responsiveness to foreign shocks, adjusting their labour and material inputs differently during downturns and recovery periods. Small firms show limited adjustment in employment, regardless of the period. Our additional analyses show that the impact of foreign demand shocks on firms' market reorientation is limited, except for specific cases where firms exporting low-medium-technology products substitute exports with domestic sales. In Chapter 3, we expand the analysis to the effects of the Covid-19 pandemic on firms' performance and employment dynamics. Using data from ASEAN-5 countries from Q1-2018 to Q3-2021, we examine the heterogeneous effects of the pandemic on firms' revenue, costs, profitability, and employment. Our findings highlight revenue losses as the main challenge, exacerbated by prolonged restrictions and idle inventories. In response to revenue shocks, firms adjust employment with an elasticity of approximately 0.10, indicating a 1% reduction (increase) in headcount for a 10% decline (increase) in revenue in the short run. Employment adjustment paths vary across countries and industries, reflecting the severity of the pandemic and each country's structural factors. Existing literature suggests that labour regulations play a crucial role in influencing adjustment costs, so multinational firms tend to favour countries with flexible labour regulations. However, there exists a delicate balance, as the pursuit of labour market flexibility to attract foreign direct investment (FDI) may potentially compromise labour standards. Based on these literature and our observations in the previous chapters, Chapter 4 investigates the impact of hiring and firing regulations (HFR) on foreign direct investment (FDI) at different stages of economic development. Analysing multi-country data from 2003 to 2015, we find that flexible HFR plays a crucial role in attracting FDI during early economic development stages. However, the impact diminishes as the country progresses economically, suggesting that higher-income countries can prioritise labour standards without compromising FDI attractiveness, thus avoiding a 'race to the bottom' in labour standards.