Export profitability and firm R&D: on China's export diversification under trade war

Abstract

China has become the world's largest export economy and the Sino-US trade war since 2017 has brought about serious implications for its foreign trade. To mitigate the effect of the trade war, China has tried to diversify exports from the US to other major trade partners. This paper aims to study the impact of the trade war on the export profitability of Chinese manufacturing firms and examine the role of firm R&D activities in their export diversification process. It is found that under the trade war, firm export profitability with intensive exports to the US declined, but the negative shock is less potent for firms with more R&D activities. In addition, the resilience of R&D-intensive firms stems from two distinctive abilities, i.e., the ability to attract new customers in different alternative markets and the ability to optimize the composition of market niches.