Product Scope Adjustment to the China Shock : Competition at Home and Abroad

This paper investigates the plant-level product scope adjustment to rising import penetration at home and to growing export competition abroad, both of which have been originating from the China trade shock. Using Korean plant-level datasets with detailed product shipment and export information between 2006 and 2018, we uncover an under-explored channel such that export competition in foreign markets, in addition to import penetration in the domestic market, contracts a product scope of plants. Particularly, the product churning effects are observed only for exporting plants. We further dissect the contraction in product scope for exporters and find that: (i) export competition dampens the creation of new products; while in contrast, (ii) import penetration precipitates the destruction of existing products; moreover, (iii) the import-induced product destruction reallocates their resources towards core products. We propose disproportionate importance of domestic market, a forward-looking aspect of product creation, and competition-induced creative destruction as potential drivers of these results