Equation (6) compares a firm outcome for two observationally equivalent firms facing a larger versus a smaller GFC foreign shock. As in the case of our worker specifications, we allow the coefficient _θt_ on the GFC firm shock variable (fixed at its 2008 value) to vary over time and hence depict the dynamic impacts on the firms in each year from 2009 onward. We estimate Equation (6) by OLS and obtain robust standard errors clustered by firm.

# **Effects on Firms’ Revenues, Exit and Size**

The estimates in Table 5 allow us to understand how incumbent firms are affected by GFC foreign shocks in terms of their revenues and profit rates - the first line of impact of a demand shock - as well as exit and size (in terms of employment and wages).<sup>37</sup> Firms harder-hit by GFC foreign shocks experience a persistent reduction in firm revenues and profit rates until 2014, as seen in columns (1) and (2). Column (3) shows that firms suffer a higher probability of exit in 2010 and 2011 and in 2015 and 2016 as a result of a GDP decline in their destinations.

Large economic disruptions can be important moments of restructuring whereby workers and other inputs of production are freed from low-productivity firms, allowing them to move to higher-productivity firms as the economy recovers. Such disruptions can have positive cleansing effects that increase (aggregate) productivity if poor-performing firms actually exit and the reallocation of resources towards more productive firms takes place (Caballero & Hammour, 1994; Osotimehin & Pappad`a, 2017; Dix-Carneiro et al., 2021; Dias & Robalo Marques, 2021). However, the evidence is not clear-cut that markets select the most productive firms, as past crises resulted in the exit of both stronger as well as weaker firms (Foster et al., 2016; Hallward-Driemeier & Rijkers, 2013). If there were cleansing effects from GFC foreign shocks, we would expect the increases in exit estimated in Brazil to be higher for less efficient firms. To test this hypothesis, we estimate a variant of Equation (6) where, in addition to allowing the firm shock variable in 2008 to have a coefficient that varies over time, we allow the firm shock variable in 2008 to be interacted additionally with one of three proxies for firm efficiency: firm size in 2007, firm labor productivity or one of three firm total factor productivity (TFP) measures obtained either by Levinsohn & Petrin (2003), Ackerberg et al. (2015) or Wooldridge (2009) estimation.<sup>38</sup> The probability of exit due to the GFC firm shocks is significantly lower for larger firms and for more productive firms (see Appendix Table D1).

> 37Net revenues and profit rates are based on Brazil’s PIA manufacturing survey. Exit, the logarithm of firm size defined as the total number of workers employed by the firm in each year and the logarithm of the firm total wages defined as the sum of monthly real wages across all workers employed by the firm in each year are based on Brazil’s RAIS starting worker-level database. The definitions of these variables are provided in Appendix A. Our regressions rely on firm samples where the top and bottom 1 percent of the distribution of the continuous outcome variables are dropped.

> 38The estimates using labor productivity or TFP are based on the the PIA survey and were thus obtained in the secure room at IBGE premises in Rio de Janeiro.

18