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Wednesday, May 4, 2005

Study: Plant closures and capital retirement

1960 to 1999

More than one-half of all new manufacturing plants cease production and go out of business within only six years of starting up, according to a new study that shows manufacturing plants have relatively short lives.

The study Death in the Industrial World: Plant Closures and Capital Retirement measures the closure rate over a 40-year period for new plants in the Canadian manufacturing sector.

It uses a database developed from the Annual Survey of Manufactures for 1960 to 1999 to provide information on the likely length of life of capital invested in plants.

The study found that on average, 14% of new plants die in their first year. Over half of new plants die by the time they are six years old, while by the age of 15, less than 20% of new plants are still operational.

Average length of life of new manufacturing plants (years) by industry
  Unweighted mean Weighted mean1
All industries 9.4 16.5
Food and beverage 10.1 18.4
Tobacco 14.3 23.3
Rubber and plastics 10.0 16.2
Leather and footware 9.8 15.5
Textiles and clothing 9.6 15.1
Wood 7.6 15.0
Furniture and fixtures 7.5 14.0
Paper and allied products 13.1 18.3
Printing and publishing 9.7 17.0
Primary metal 13.1 22.6
Metal fabricating 9.8 14.5
Machinery 9.8 16.0
Transportation equipment 9.2 19.1
Electrical and electronic products 9.4 14.9
Non-metallic mineral products 9.8 14.9
Refined petroleum and coal 10.4 16.2
Chemical and chemical products 10.5 17.4
Miscellaneous 8.8 13.3
1. Weighted by total employment.

The average new plant operates for only 9 years, or 17 years if the average is weighted on the basis of employment. These rates vary by industry.

Plants lasted 13 years, the longest average period, in two industries: primary metals, and paper and allied products. The shortest average life, fewer than eight years, occurred in wood industries.

Plant closures result from failure when firms exit an industry. But they are also associated with renewal, such as when existing firms close down plants, modernize their production facilities and start up new ones.

The high rate of plant closure has several ramifications, the most immediate of which is its impact on labour markets. It means that a job within one production facility is not likely to last a lifetime.

The closure process also results in capital losses, that is, it leads to the loss of earlier investments that the industrial system had made in productive capacity. Resources that had been used to make equipment or to construct plants to house machinery are lost.

The capital that has been invested in a plant that is suddenly shut down loses some, or most, of its value. This exit process has consequences in terms of the amount of capital that the industrial system has available to it.

The research paper Death in the Industrial World: Plant Closures and Capital Retirement, no. 33 (11F0027MIE2005033, free) is now available online. From the Our products and services page, under Browse our Internet publications, choose Free, then National accounts.

More studies on the industrial competition and dynamics sector are available free of charge in the analytical series Update on economic analysis on our Web site (11-623-XIE).

For more information or to enquire about the concepts, methods or data quality of this release, contact John Baldwin (951-8588), Micro-economic Analysis Division.

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Date Modified: 2005-05-04 Important Notices