Firm Entry, Exit and Suspension

Abstract

Household businesses make up the majority of firms in developing economies. This paper uses a novel tax census database that covers the universe of tax-registered household businesses to analyze the entry and exit of owner-operated firms in Vietnam during January 2018 to August 2020. It documents new stylized facts about the survival dynamics of informal businesses. First, the entry and exit rates were about 5-6 percent a year for tax-registered household businesses during the pre-pandemic period. Second, an additional 25 percent of household businesses suspended their activity in a year on average, with the annual suspension duration exceeding 2.5 months. The suspension rate spiked to 40 percent during the onset of the COVID-19 pandemic in 2020. Third, the findings show that the pandemic-related effects were more pronounced for businesses dependent on face-to-face interactions with customers and suppliers. However, these effects were short lived, and activity and earnings rebounded by August 2020. The findings may reflect the relatively short COVID-19 distress in Vietnam during the first phase of the pandemic, but they illuminate both the vulnerabilities and resilience of the household business sector.