Export Expansions, Local Production Networks and Markup Adjustments

Using China’s accession to WTO in 2001 as an episode for trade liberalization, this paper empirically investigates whether export expansions affect firms’ markup adjustments through local production networks. Following Helm (2020), we construct indirect local export exposure measures to reflect how much firms in each prefecture industry cell is indirectly affected by export expansions of other local industries. We further decompose indirect export shocks into upstream and downstream shocks to analyze the role played by local production networks. Combining this with markups estimated following De Loecker et al. (2016), our empirical results suggest that the average level of indirect export shocks would lead to a 0.363 decrease in markups. This magnitude accounts for 6.862% of overall markup changes during the 2000-2007 period. In particular, the baseline results are driven by local indirect shocks from downstream industries. Further empirical analysis shows that reductions in firms’ markups are induced by increased competition and increased demand for local upstream inputs, which can be summarized as the \indirect pro-competitive effects" and \competition for local intermediate inputs effects". Further analysis at the prefecture-industry level reveals that the impact mainly exists at the within-firm margin, not at the between-firm, or entry/exit margin