Modelling Firm Failure: Towards Building a Firmographic Microsimulation Model

This paper analyzes the survival and failure of small and medium (SME) size business establishments in the city of Hamilton, Canada. The objective is to develop a business failure module that will be used in the construction of an agent-based firmographic simulation model. Such model will be utilized within a microsimulation land use and transportation planning support system (PSS). A longitudinal database is extracted from Statistics Canada Business Register (BR) to determine the duration of survival for small and medium (SME) size business establishments. We follow the annual life trajectory of each establishment in the 1996 population till 2002 and record the year when the establishment failed. Business establishment failure is modeled by specifying and estimating discrete-time hazard duration models for 12 economic sectors. The estimation results suggest that the business failure process can be explained by the establishment characteristics, the industry it belongs to, the geographic location it is at and the macro-economic conditions in the city. The results also indicate a variation in the significance of those factors among the different economic sectors due to establishment heterogeneity.