The Determinants of Failure of Small Manufacturing Firms: Assessing the Macroeconomic Factors

Abstract

This paper employs a time series cointegration approach to evaluate the relationship between manufacturing firm failure and macroeconomic factors for the Swedish manufacturing sector in the period 1986–2006. It uses quarterly data for this period. We found that in the long run a firm’s failure is negatively related to the level of industrial activity, money supply, GNP and economic openness rate, and positively related to the real wage. Time series Error Correction Model (ECM) estimates suggest that macroeconomic risk factors impinge on firm failures on the same direction in both the short run and the long run and that adjustment to stabilize the relationship is quite slow.