Trade Liberalisation, Product Complexity and Productivity Improvement: Evidence from Chinese Firms

Abstract

AbstractThis paper investigates the impact of trade liberalisation on firm productivity by using both Chinese manufacturing firm‐level data and highly disaggregated Chinese import data from 1998 to 2002. We construct a measure of firms’ total factor productivity by adopting an augmented Olley–Pakes semi‐parametric methodology to correct the simultaneity bias from reverse causality and selection bias from firms’ exits. Even when controlling for the endogeneity, trade liberalisation increases productivity for firms that produce complex goods (highly differentiated products). In contrast, we found that trade liberalisation has an opposite effect on the productivity of the producers of simple goods. Moreover, the effect of trade liberalisation on exporting firms is found to be smaller than that on non‐exporting firms. Our main results are robust to the use of different econometric methods.