Diversification, economies of scope, and exports growth of Chinese firms

TL;DR

This paper examines Chinese firms' trade patterns from 2000 to 2006, highlighting how diversification and economies of scope contributed to export growth amid trade liberalization and increased volatility.

Contribution

It provides empirical evidence on the roles of product and destination diversification and economies of scope in driving Chinese export growth during a period of structural reforms.

Findings

Diversification positively impacts trade growth.

Destination diversification has a stronger effect than product diversification.

Trade volatility increased after liberalization.

Abstract

In the 1990s, China started a process of structural reforms and of trade liberalization, which was followed by the accession to the World Trade Organization (WTO) in 2001. In this paper, we analyze trade patterns of Chinese firms for the period 2000-2006, characterized by a notable increase in exports volumes. Theoretically, in a more open economy, firms are expected to move from the production of a set of less-competitive products towards more internationally competitive ones, which implies specialization. We study several stylized facts on the distribution of Chinese firms trade and growth rates, and we analyze whether firms have diversified or specialized their trade patterns between 2000 and 2006. We show that Chinese export patterns are very heterogeneous, that the volatility of growth rates depends on the level of exports, and that volatility is stronger after trade liberalization. Both, diversification in products and destinations have a positive impact on trade growth, but diversification of destinations has a stronger effect. We conclude that the success of Chinese exports is not only due to an increase in the intensive margin, related to the existence of economies of scale, but also due to an increase in the extensive margin, related to the existence of economies of scope.