Speeding Up the Product Cycle:The Role of Host Country Reforms

We study the effects of policy reforms in the South on the decisions of intrafirm and arm’slength production transfers by Northern firms. We show theoretically that relaxing ownershipcontrols and improving contract enforcement can induce multinational companies to expandproduct varieties to host developing countries, and that a combination of the two reforms hasan amplifying effect on product transfers. Consistent with these implications, we find thatownership liberalization and judicial quality played an important role in raising the extensivemargin of processing exports in China for the period of 1997-2007. Our findings imply thatinstitutional reforms in developing countries can effectively speed up the product cycle....