Processing export and firms’ social security contributions in China: The role of supply chain pressure

Abstract

This paper investigates the effects of processing export on firms’ social security contributions. A consistent pattern emerges that processing exporters in China exhibit higher actual contributions relative to ordinary exporters. This finding is intriguing, as processing exporters have been found to be inferior on various margins, such as wages and productivity. We propose and test a potential mechanism from a labor standard perspective, supply chain pressure, where processing exporters are compelled by downstream importers to adhere to certain codes of conduct in order to avoid reputation damages. We discuss endogeneity problems arising from various sources that may affect the validity of the proposed mechanism, and adopt instrumental variable estimation to address any unobserved concerns. Moreover, despite the unquantifiability of supply chain pressure, supportive evidence is found as pure-assemblers, processing exporters in high-exposure industries, those with destinations in developed countries and those in export-intensive regions exhibit relatively higher contributions, as predicted by the theory. These findings also negate competing hypotheses from the traditional labor cost perspective. Furthermore, non-state-owned, small, and low-paying firms are more susceptible to supply chain pressure than their respective counterparts. Our findings contribute to a better understanding of the behavioral differences between processing and ordinary exporters.