Factor Intensity, Product Switching, and Productivity: Evidence from Chinese Exporters

Abstract

This paper analyzes the causal relations between firms' productivity, factor intensity and export participation. Using propensity score matching techniques and firm level panel data for Chinese manufacturing firms over the 1998-2007 period, we find strong evidence of domestic firms self selecting into export markets with higher productivity ex ante, and enhanced productivity ex post. No such pattern is observed among foreign invested firms. We also find that both domestic and foreign new exporters exploit China's low labor costs and specialize in their core competence, that is, firms become less capital intensive after exporting, relative to the matched non exporting counterparts in the same industry. To rationalize these results that contrast with most findings in the existing literature, we develop a variant of the multi-product model of Bernard, Redding, and Schott (2010) to consider varying capital intensity across products. Using transaction level export data, we find evidence that Chinese exporters add new products that are more labor intensive than existing products and drop products that are less labor intensive, supporting the model predictions. Firms with a bigger decline in capital intensity after exporting are found to have a larger increase in measured TFP.