Firm Exit and Exchange Rates: An Examination with Turkish Firm-Level Data

By Nazlı Karamollaoğlu (MEF University, Turkey) and M. Ege Yazgan (Istanbul Bilgi University)

Policy Brief: 

Exchange rate movements have important implications for survival patterns, particularly for exporting firms in developing countries where exchange rates are more volatile compared to the developed world. Real exchange rate movements are thought to act like tariffs in how they affect survival behavior by altering firms’ competitive positions in both domestic and international markets. In this context, real exchange rate appreciation acts as an increase in foreign tariffs, creating a cost disadvantage for domestic producers in the export markets and raising the level of competition. Consequently, the least productive firms exit the market. For the case of a developing country, the impact of exchange rate appreciation on firms survival is expected to be larger as transactions are generally not hedged because forward markets are not accessible to the bulk of the traders.

The micro-level empirical research in this line of research has mostly concentrated on analyzing the effects of currency variations on firms’ survival, particularly for developed countries due to the lack of data in developing countries.  Using a unique firm-level dataset, compiled by the Central Bank of Turkey, we test the impact of currency appreciation on the survival behavior of Turkish firms in the manufacturing industries for 2002-2009.

Our results indicate that a 1% real appreciation of the Turkish Lira with respect to currency basket, composed of equally weighted US Dollar and Euro, for a given firm decreases the probability of survival by 5%. In comparison to previous empirical studies covering developed countries, such as Baldwin and Yan (2012), Berman et al. (2012), the impact of currency appreciation on the Turkish firms’ survival is much higher. This can be considered as evidence of relative vulnerability of firms in a developing country.  We also find evidence that the high productivity firms have higher probability of survival than the low productivity firms in the presence of exchange rate variation.

From an economic policy point of view, these results emphasize the danger associated with a domestic currency appreciation following a surge of capital inflows and relying on internal demand, through the expansion of domestic credits, as the main driver of economic growth. The case of Turkey constitutes such an example, with its highly volatile GDP growth depending on the intensity of capital inflows (see, for example, Akat and Yazgan (2012)). Especially in a resource constrained emerging market economy such as Turkey (due to low domestic savings), tradable sector,  given its capacity to create foreign resources,  should play an important role as the engine of a sustainable and employment creating growth. However, the evidence presented in this paper indicates that continuing appreciation of domestic currency may have detrimental effects on the development of resilient and strong tradable sector firms.


Akat, Asaf S., and M. Ege Yazgan. (2013),  “Observations on Turkeys Recent Economic Performance”. Atlantic Economic Journal, 41(1):1-27.

Baldwin, John R. & Yan, Beiling, (2010), “Export Market Dynamics and Plant-level Productivity: Impact of Tariff Reductions and Exchange Rate Cycles,” Economic Analysis (EA) Research Paper Series 2010063e, Statistics Canada.

Berman, Nicolas & Martin, Philippe & Mayer, Thierry, (2009). “How do different exporters react to exchange rate changes? Theory, empirics and aggregate implications,” CEPR Discussion Papers 7493, C.E.P.R. Discussion Papers.

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