Domino effect of factory closures in Shenzhen

Shenzhen's Silent Exodus: How Factory Closures Impact the Electronics Industry

Soraya Malik in Business & Economy August 2025 • 4 min read.

"Uncover the hidden ripple effects of foreign-invested enterprise exits in Shenzhen's electronics manufacturing sector and what it means for the future of global supply chains."

The global economy is a tangled web, and sometimes, when one thread breaks, the whole thing can start to unravel. For years, experts have been studying how local factors influence whether businesses are born, grow, or simply survive. But what happens when businesses close down? The story of factory closures, or 'firm exits,' is only now starting to be understood, especially concerning how one closure can impact the surrounding business community.

New research focuses on Shenzhen, China, a major hub for electronics manufacturing. This study dives into the domino effect of foreign-invested enterprises closing their doors between 2017 and 2021. It's not just about one factory shutting down; it's about how that closure triggers a chain reaction for other businesses nearby. This is especially relevant now, as global trade faces unprecedented challenges.

This article explores how the closure of a foreign-owned factory can create ripples throughout the local economy. We'll break down the key findings of the Shenzhen study, translate the complex data into plain English, and discuss what this means for businesses and consumers worldwide. By the end, you'll understand why these seemingly isolated events can have such a significant impact on the products you use every day.

The Domino Effect: Unpacking Exit Spillovers

Domino effect of factory closures in Shenzhen

Imagine a neighborhood where several businesses rely on each other: a bakery that sources flour from the mill next door, a mechanic who gets parts from the auto shop across the street. When one of these businesses closes, it doesn't just affect the owner; it impacts everyone connected to it. This is the basic idea behind 'exit spillovers.'

In Shenzhen's electronics manufacturing industry, many foreign-invested enterprises operate within a complex network. They might share suppliers, customers, or even specialized knowledge. When one of these firms exits, it can disrupt the entire local supply chain.

Loss of Specialization Benefits: If a factory specializing in a particular component closes, other firms may struggle to find alternative sources, increasing their costs.
Supply Chain Disruption: A closure can interrupt the flow of goods and services, leaving other businesses scrambling to find new partners.
Market Share Shifts: While some firms might benefit from a competitor's exit, the overall instability can create uncertainty and discourage investment.

The study also considered external shocks, like the U.S.-China trade war (starting in 2018) and the COVID-19 pandemic. These events not only directly impacted businesses but also amplified the domino effect of firm exits. For example, tariffs on specific industries forced some firms to leave, further disrupting specialized production and affecting the likelihood of other firms' leaving.

What Does This Mean for You?

The Shenzhen study offers a glimpse into the interconnectedness of the global economy. When factories close, it's not just a local issue; it can have far-reaching consequences. Understanding these dynamics is crucial for businesses, policymakers, and consumers alike. By recognizing the potential impact of exit spillovers, we can better prepare for disruptions, support local economies, and build more resilient supply chains for the future.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2404.18009,

Title: Exit Spillovers Of Foreign-Invested Enterprises In Shenzhen'S Electronics Manufacturing Industry

Subject: econ.gn q-fin.ec stat.ap

Authors: Hanqiao Zhang

Published: 27-04-2024

Everything You Need To Know

What are 'exit spillovers' in the context of Shenzhen's electronics industry?

In the context of Shenzhen's electronics industry, 'exit spillovers' refer to the cascading negative effects that occur when a foreign-invested enterprise closes down. This isn't just about the immediate loss of that specific business; it's about the ripple effects it has on the surrounding businesses. These effects can include the loss of specialization benefits, supply chain disruptions, and shifts in market share. When a factory exits, its closure can disrupt the established network of suppliers, customers, and specialized knowledge that other firms rely upon, impacting the local supply chain and even increasing costs for other businesses.

How did the U.S.-China trade war and the COVID-19 pandemic impact the 'domino effect' of factory closures in Shenzhen?

The U.S.-China trade war, which began in 2018, and the COVID-19 pandemic were external shocks that amplified the domino effect of firm exits in Shenzhen. These events directly impacted businesses and created additional challenges. The trade war, for example, led to tariffs on specific industries, forcing some foreign-invested enterprises to close their doors. This, in turn, disrupted specialized production, increasing the likelihood of other firms exiting. The pandemic further exacerbated these issues by disrupting global supply chains and creating economic uncertainty, compounding the problems caused by firm exits.

What are the main consequences of a foreign-invested enterprise closure in Shenzhen on other businesses?

The closure of a foreign-invested enterprise in Shenzhen can lead to several consequences for other businesses. One key impact is the loss of specialization benefits. If a factory specializing in a particular component closes, other firms may struggle to find alternative sources, which then increases their costs. Furthermore, the closure can disrupt the local supply chain, interrupting the flow of goods and services, causing other businesses to scramble to find new partners. Finally, while some firms might benefit from a competitor's exit, the overall instability can create uncertainty and discourage investment within the local economy.

Why is understanding 'exit spillovers' important for businesses and consumers?

Understanding 'exit spillovers' is crucial for both businesses and consumers because it highlights the interconnectedness of the global economy. For businesses, it helps to recognize the potential risks associated with relying on a complex network of suppliers and partners. By understanding the impact of firm exits, businesses can better prepare for potential disruptions and work to build more resilient supply chains. For consumers, this understanding can help inform them about the factors that influence the availability and cost of the products they use daily, recognizing that local events can have far-reaching consequences that impact the global economy.

What is the significance of the Shenzhen study in relation to the global economy and supply chains?

The Shenzhen study offers a valuable insight into the interconnected nature of the global economy and the potential vulnerabilities within supply chains. By focusing on the impact of foreign-invested enterprise closures in Shenzhen, the study highlights the domino effect and the far-reaching consequences that can arise from seemingly isolated events. The study emphasizes the importance of recognizing exit spillovers to better prepare for future disruptions, support local economies, and build more resilient supply chains worldwide. Understanding these dynamics is crucial for businesses, policymakers, and consumers to navigate the complexities of the global economy and mitigate potential risks.