Export duration and firm markups: evidence from China

Abstract

Against the backdrop of China’s upgrading of its openness to the outside world, analyzing the impact of export markets on a firm’s markup—an important indicator of a firm’s pricing power and market power—is of great significance for improving the firm’s international competitiveness and the benefits of the global value chain. This study theoretically and empirically examines the effect of export duration on firm markups using micro data from Chinese manufacturing enterprises. According to a theoretical study, an increase in export duration will result in an increase in firm markups via the “production efficiency” channel but a decrease in firm markups via the “market-based pricing” channel. Therefore, the impact of an increase in export duration on the markups of firms is uncertain. Results of the empirical analysis reveal that the positive impact of an increase in export duration on the markups of Chinese manufacturing firms via the “production efficiency” channel is higher than the negative impact of an increase in export duration via the “market-based pricing” channel. Overall, the increase in export duration has a positive impact on Chinese manufacturing companies’ markups. This conclusion is valid after a series of robustness tests. Further analysis reveals that the impact of export duration on the markups of different types of Chinese manufacturing firms differs, and significant heterogeneity exists. This research can help us better understand how Chinese export firms fall into the “low markup trap” and offer fresh insight into how export markets affect company markups.