Abstract
This paper presents theory and evidence that institutional reforms in developing countries can help expand their product varieties in exports. Our model suggests that relaxing ownership restrictions on foreign direct investment, improving contract enforcement, and reducing offshoring cost can induce multinational companies to produce new products in host developing countries, particularly in headquarter-intensive industries. Consistent with these theoretical predictions, we find empirical evidence that ownership liberalization, judicial quality and decline in offshoring costs played an important role in increasing the extensive margin of processing exports in China for the period of 1997-2007.
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