Importing, Exporting, and Firms’ Productivity Evolution in China

Firms display remarkable persistence in exporting and importing status. However, export and import status do not overlap perfectly, as some exporters do not import while some importers do not export. Motivated by these facts, I develop a dynamic discrete choice model of a firm’s decision to import and export. A firm needs to pay either sunk costs to initiate an activity or fixed costs to maintain that activity, anticipating that the decision would impact its future productivity and expected revenue. Estimating the model for a range of Chinese industries, I find that both activities benefit a firm’s future productivity. Then, I investigate the impact of trade liberalization and government subsidy policies on firms’ importing and exporting behavior using the estimated model. A simulation of market expansion raises both exporting and importing participation rates and generates a modest increase in mean productivity. Subsidizing either the sunk costs or the fixed costs of one activity raises the activity’s participation rate while discourages the other activity. In addition, subsidizing the fixed costs of exporting generates a larger increase in total foreign market revenue than subsidizing the sunk costs of exporting