Firm heterogeneity, market choice and productivity: Evidence from foreign‐owned enterprises in China

Abstract

This study examines the effects of firm heterogeneity on foreign‐owned enterprises’ (FOEs) choices regarding serving the local market, undertaking assembly exports or undertaking ordinary exports. It also investigates the effects of serving these markets on productivity. Using a detailed firm–transaction level matched data set of FOEs in China covering 2000–07, the first‐stage estimation of propensity score matching (PSM) method reveals that less productive FOEs tend to undertake assembly exports, and this effect is particularly relevant to those located in inland regions. By contrast, more productive FOEs are likely to serve domestic markets or undertake ordinary exports. Other firm characteristics also exhibit diverse influences on market choices. Export‐oriented FOEs, particularly those undertaking assembly exports, experience lower productivity growth than that of local market‐oriented FOEs. This suggests that the effects of local market competition do result in substantial enhancement of the productivity of FOEs in China. This pattern is mainly exhibited by FOEs in inland regions, whereas FOEs undertaking ordinary exports in coastal regions might have somewhat higher total factor productivity (TFP) growth than their local market‐oriented counterparts. Among export‐oriented FOEs, exporting more product value—whether assembly or ordinary exports—has a positive influence on productivity.

Do exporters have markup premiums and why (not)? Evidence from China

“…This result echoes those of Lu et al. (2010) and Yang and Tsou (2018), who show that FIEs with only local sales are more productive. Concerning the learning effect, the lower panel of Table 6 shows that using the full sample and domestic firms.…”

“…As mentioned previously, firms conducting processing exports, whether domestic or FIEs, can enjoy tariff-free imports of intermediate goods. Firms with low productivity can thus enter the international market (Yang & Tsou, 2018;Yu, 2015) and make a small profit. 2 Without such tariff advantages, firms, mainly domestic, undertaking ordinary trade would need to be more productive to cover the sunk costs of exports, potentially leading to lower markups.…”

“…Further, cuts in output tariffs after China's WTO access reduce markups (Brandt et al., 2017; Xiang et al., 2017). For FIEs, exporters also enjoy low‐cost labour and preferential policy measures, resulting in low productive FIEs concentrating on exports (Lu et al., 2010; Yang & Tsou, 2018). However, domestic market oriented FIEs are more productive.…”

Market size, productivity and product quality regarding firm heterogeneity

“…It also implies that the market size may drive the changes of productivity in sectors. In addition, Yang and Tsou (2018) and Chen (2019) also present their viewpoints for productivity of exporting firms. Chen (2019) indicates that when an economy opens to trade but facing a decline of market size in the open economy, managers of surviving firms with least productivity level are incentivized to do more effort and which will derive the productivity rising.…”