Firm Productivity and Exit During Economic Crisis: Does Market Potential Foster Resilience?

ABSTRACT

This paper examines the relationship between firm productivity, market potential, and firm exit over the economic cycle, focusing on the COVID‐19 crisis. Using Spanish firm‐level data (2011–2022), we analyse how market potential shapes the link between productivity and survival. The results show that while being closer to the industry productivity frontier increases survival, this relationship is moderated by market potential, indicating heterogenous selection on productivity across space. In particular, productivity differences translate into smaller survival advantages in high‐market‐potential areas. However, this moderating effect of market potential was reduced during the COVID‐19 pandemic, suggesting that spatial differences in productivity‐based selection diminished during the crisis. This indicates that competitive dynamics were altered, most likely due to the nationwide lockdowns limiting spatial economic interactions and locally implemented support schemes.