Essays on Industrial Organization in China's Manufacturing Sector

This dissertation consists of three essays that study the industrial organization of Chinas manufacturing sector from an empirical perspective. It focuses on applying industrial organization theory and econometrics to the analysis of the effects of market forces and globalization forces on the productivity of Chinas manufacturing firms.Chapter 2 examines theories of vertical specialization dated back to Adam Smith. China's economic reform offers an ideal opportunity to test the relationship between the market forces and vertical specialization of firms. Using a comprehensive firm level dataset in China's manufacturing sector, we find that vertical specialization increases total factor productivity of firms. Our estimation results support Smith's extent-of-market theory, Marshall's input sharing theory and Coase's transaction cost theory, but not Stigler's theory of industry lifecycle. We also find that transaction cost theory is more powerful than other theories in explaining vertical specialization of firms. Market reform that facilitates inter-firm transactions is the driving force behind the vertical specialization process that occurred in China's manufacturing firms during the reform period.Using a panel dataset of China's manufacturing firms from 2000 to 2003, Chapter 3 examines whether there exist productivity spillovers from foreign direct investment to domestic firms. In estimating productivity, we control for a possible simultaneity bias by using semi-parametric estimation techniques. We investigate FDI spillovers through horizontal, backward, forward and local linkages. Moreover, we allow for different spillover effects depending on the origin and market orientation of FDI and domestic firms?absorptive capacity. Our evidence suggests that FDI in China tends to generate spillovers mainly through backward and local linkages. We find little evidence of horizontal and forward spillovers.Chapter 4 analyzes the relationship between firm productivity and export behavior in China's manufacturing firms. We find that exporters show superior initial performance relative to non-exporters, which is consistent with the self-selection hypothesis. Moreover, using matching and difference-in-difference methods, we find strong evidence supporting the learning-by-exporting hypothesis. On average, exporting raises the productivity by 13 percent in the first year.