Export and Productivity of Chinese Manufacturing Firms LU Jiangyong October 14, at CEFIR

Motivation Importance of export for China  China’s total export (billion USD): 10  762  36 Percentage of GDP Complex, interesting, but less studied  Rodrik (2006): China export much higher productivity products than expected based on its income per capita  Xu (2006): not so sophisticated after adjustment of quality  Gilboy (2004): “high-end” exports are dominated by FIEs  “8 hundred million shirt for a Boeing”

Issues Policy issues  Whether Chinese indigenous firms benefit from export?  If so, what roles do foreign affiliates play? Academic issues  Are the relationship between export and productivity different for indigenous firms and foreign affiliates?  If so, why?

Literature on Export and Productivity Empirical Evidences  Stylized fact: exporters are different from non-exporters (larger, more productive, more capital intensive, etc.)  Explanations Self-selection (SS) in developed and developing countries Learning by exporting (LE) not in developed countries, but in developing countries (recently) Theoretical Developments  Interaction between productivity differences and fixed costs of exporting (Melitz, 2003) Most productive firms: domestic market + export (FDI) Intermediate firms: domestic market only Low-productive firms: close down

Empirical Evidence from China China  Kraay (1999) SS not studied; Support LE Biased sample  Size and ownership bias: 96% output by 2.5% firms (SOE)  Exporter bias: over 70% firms are exporter  Industry bias: industries with 42% output in the population are not represented  Xu (2005) No evidence on SS; Some evidence on LE Survey data

Representativeness of the sample in China ’ s total export

Fact #1 – Geographic Concentrated Share in China's Total Export (2005)  Top 3:59.1% Guangdong: 30.33% Jiangsu: 16.13% Zhejiang: 12.66%  Next 3:23.6% Shanghai: 10.73% Shandong: 7.31% Fujian: 5.54%  Top 6:82.7%

Fact #2 – Foreign affiliates export more Foreign affiliates:  Wholly owned; Joint Venture; Contractual  Hong Kong, Macau, and Taiwan; Other countries Facts  % of exporter (mean ) All: 27.14% ; FIE: 62.93%; Indigenous: 18.68%  % of output exported (mean ) All: 20.33% ; FIE: 40.95%; Indigenous: 10.48%  % of China’s export exported by FIEs 1998: 59.66%  2005: 70.98%

Exporter Premia %

Self-Selection into exporting TFP Estimation:  Firm-level and industry-level price deflators  Levinsohn and Petrin (2003): use intermediate inputs as the proxy of unobservable productivity shocks Binary choice model:  DV: Export or Not  IV: fixed costs of exporting + firm characteristics + (industrial and regional) export by foreign affiliates Unobserved firm characteristics:  Fixed-effect model  Arellano-Bond GMM (1991, 1998)

Export decision

Learning by exporting Sample:  Firms that did not export in 1998 Models:  DV: TFP  IV: export status in previous year, firm-specific and other factors that may explain TFP  Fixed effects model accounting for persistence of productivity  Dynamic GMM (Arellano-Bond, 1991, 1998)

Learning by exporting

Selection bias Matched sample based on propensity score of export decision

Learning by exporting (matched sample)

Hong Kong, Macau, and Taiwan vs. Other countries (OECD) NO significant difference between HMT affiliates and OECD affiliates  % of exporter (60.8% vs. 62.4%)  Export intensity (43.7% vs. 40.2%)  Exporter premia(TFP premia “-”)  Self-selection(coefficient of TFP “-”)  Learning by exporting (coefficient of previous export status “-”)

Explanation of differences between indigenous and foreign affiliated firms Export decision (fixed cost of exporting)  Foreign affiliates Distribution advantages in international markets More productive than indigenous firms Learning by exporting  Foreign affiliates Seeking for cheap resources Inter-firm export (77% for affiliates of U.S. companies)  Indigenous firms Higher quality requirement Competition

Explanation of differences between indigenous and foreign affiliated firms Transfer pricing  For foreign affiliates, export facilitates transfer pricing  In China, 300 million Yuan illegal transfer pricing in 2005 Policy restrictions  Before 2001, to establish wholly owned foreign affiliates, (1) employing advanced technologies and equipments, or (2) export at least 50% of total output  Correlation of technology level (R&D intensity, new products percentage, intangible assets) and export intensity for wholly owned foreign affiliates is negative and significant before 2001, but insignificant after then

The End