Weathering the Storm : Responses by Cambodian Firms to the Global Financial Crisis

Firms have various ways to cope with external risks. This paper analyzes the risk coping behavior that entails the smoothing of inputs (labor, raw materials, or capital). The theoretical framework shows that, if they face adjustment costs, firms pr...

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Bibliographic Details
Main Authors:	Guimbert, Stephane, Oostendorp, Remco
Format:	Policy Research Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2013
Subjects:	ACCESS TO CREDIT ACCESS TO FINANCE ACCESS TO FORMAL FINANCE ADJUSTMENT COST ADJUSTMENT COSTS AGRICULTURE AVAILABILITY OF FINANCE BANKRUPTCIES BANKRUPTCY BARGAINING POWER BRANCHES BUSINESS ENVIRONMENT CAPITAL MARKET CAPITAL MARKETS CAPITAL REGULATION CAPITAL REQUIREMENTS CAPITAL STOCK COMMERCIAL BANKS CONSUMPTION SMOOTHING CORPORATE PERFORMANCE CREATIVE DESTRUCTION CREDIT CONSTRAINED FIRM CREDIT CONSTRAINED FIRMS CREDIT CONSTRAINT CREDIT CONSTRAINTS CREDIT CRUNCH DEVELOPMENT ECONOMICS DEVELOPMENT POLICY DRIVERS EARNINGS ECONOMIC CRISES ECONOMIC CRISIS ECONOMIC POLICY ECONOMIC SHOCKS ELASTICITY EMPLOYMENT EMPLOYMENT GROWTH EMPLOYMENT IMPACT EXPORTS EXTERNAL FINANCE FACTOR DEMAND FINANCIAL CRISIS FINANCIAL DEVELOPMENT FINANCIAL INSTITUTION FINANCIAL POLICY FINANCIAL SECTOR FINANCIAL SECTOR DEVELOPMENT FINANCING NEED FIRM LEVEL FIRM PERFORMANCE FIRM PRODUCTIVITY FIRM SIZE FIRM SURVEY FIRM SURVEYS FIXED COST FIXED COSTS GDP HOUSEHOLDS ID INEQUALITY INFLATION INFLATION RATE INFORMAL FINANCE INPUT PRICES INSURANCE INTERNATIONAL BANK INVENTORIES INVENTORY INVESTMENT DECISIONS LABOR DEMAND LABOR MARKET LABOR MARKET ADJUSTMENT LABOR MARKET OUTCOME LABOR MARKETS LABOR POLICY LABOR PRODUCTIVITY LINES OF CREDIT LIQUIDITY MACROECONOMIC POLICIES MACROECONOMIC STABILITY MANUFACTURERS MARGINAL COST MONEY LENDERS MULTIPLIERS NEW BUSINESS OPTIMIZATION OWNERSHIP STRUCTURE PERMANENT EMPLOYMENT PERMANENT WORKERS POOR ACCESS PREVIOUS SECTION PRIVATE COMMERCIAL BANKS PROBIT REGRESSION PRODUCTION CAPACITY PRODUCTION WORKERS PRODUCTIVE FIRMS PRODUCTIVITY PRODUCTIVITY DISTRIBUTION PRODUCTIVITY LEVELS REAL ESTATE RETAINED EARNINGS SAFETY NETS SAVINGS SKILL TYPE SKILLED WORKERS SOCIAL SAFETY NETS SUPPLIERS TEMPORARY WORKERS TOTAL COSTS TOTAL EMPLOYMENT TOTAL FACTOR PRODUCTIVITY TRADE CREDIT UNSKILLED LABOR UNSKILLED WORKERS VALUE ADDED VILLAGE WAGE SUBSIDIES WAGES WORKER WORKERS WORKING CAPITAL
Online Access:	http://documents.worldbank.org/curated/en/2012/10/16812612/weathering-storm-responses-cambodian-firms-global-financial-crisis http://hdl.handle.net/10986/12064

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Summary:	Firms have various ways to cope with external risks. This paper analyzes the risk coping behavior that entails the smoothing of inputs (labor, raw materials, or capital). The theoretical framework shows that, if they face adjustment costs, firms prefer to smooth their inputs, especially if they expect a demand shock to be temporary. However, credit constrained firms will be adversely affected by the presence of liquidity constraints, and this will create a welfare loss due to incomplete smoothing. The authors estimate this behavior using a panel of Cambodian firms at the time of the 2008 global economic crisis. The survey shows that these firms were hard hit by the economic crisis between 2008 and 2009, with an average fall in demand (sales) of 30 percent. Based on the theoretical framework, the analysis can estimate the responsiveness of labor, capital, and raw materials input demand to demand shocks. It finds that firms try to smooth in particular if they believe the shock is temporary; in fact non-credit constrained firms reduce their inputs much less than firms that were credit constrained when the demand shock is expected to be temporary. The paper estimates that the welfare loss from incomplete smoothing due to credit constraints is many multiples of the adjustment costs of the firms that were not credit constrained. This has important policy implications about the role of financial sector development and regulations beyond the capital market. This micro analysis also has macro implications: if all firms expect a shock to be permanent, their combined limited smoothing of inputs will indeed make the shock more likely to be permanent.

Weathering the Storm : Responses by Cambodian Firms to the Global Financial Crisis

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