Input Prices, Productivity and Trade: Evidence from Chinese Paint Manufacturers

Economics

Speaker:Shengyu Li, Durham University
Date: Wednesday 21 September 2016
Time: 14.30
Location: Streatham Court B

Further details

How does international trade affect the performance of manufacturing firms? The literature has focused primarily on the impact of trade on productivity. However, trade may also directly affect firms' choice of intermediate inputs through greater variety and price competition. This potential channel for gains has received less attention, perhaps due to the lack of availability of input prices in most manufacturing datasets. To understand whether trade plays a role in reducing input prices, we propose a model of production allowing for unobserved heterogeneity in firm productivity and input prices. Our method recovers firm-level productivity and input prices controlling for firms' endogenous choices of input quality. We apply our method to a dataset from the Chinese paint manufacturing industry from 2000 to 2006. Preliminary results indicate that importing and exporting increase firm productivity by 21.7% and 4.2% respectively. Importing firms also enjoy lower input prices by 3.6% at the post-WTO tariff rate (4.9%), and higher import tariff reduces this benefit. To evaluate how these gains interact and contribute to the long-term firm value, we estimate a model of firms' dynamic import and export decisions while controlling for selection into trade. Counterfactual results show that, removing these gains from productivity and input prices channels reduce average firm value in the long run by about 1.6 and 4.8 million US dollars respectively. Further policy counterfactual results suggest that the import tariff cut after China joining WTO in 2001 increases average firm value by about 4 million US dollars through a direct effect on reducing input prices and an indirect boost of productivity in the Chinese paint industry