How You Export Matters: Export Mode, Learning and Productivity in China
Firms can choose how they export: directly or through intermediaries. What are the costs and benefits of such choices? Firms may choose to trade directly, even if this is more costly in the short run, if doing so results in better future outcomes. A policy pursued by China gives us a unique chance to look at such trade offs in the real world. Before China's accession to the WTO, a large share of domestic Chinese firms were not allowed to export directly, only through intermediaries. These restrictions on direct trading may have been a double edged sword: while firms may have been spared the costs of direct exporting, they may also have been barred from obtaining any benefits of doing so. We use frontier techniques to estimate a structural dynamic model and use it to evaluate the consequences of removing restrictions on direct trading, a major policy reform in China. We develop and estimate a dynamic discrete choice model where firms choose their export mode. We recover not only the sunk and fixed costs of exporting according to mode, but also the evolution of productivity and demand under different export modes. We find that the evolution of both demand and productivity is more favorable under direct exporting. However, on average, starting direct exporting requires significantly higher start up costs than starting indirect exporting. It is also more costly to remain a direct exporter than to remain an indirect one. Moreover, climbing the export ladder by starting off as an indirect exporter and then transitioning into direct exporting is cheaper than exporting directly to begin with. Our counterfactual experiment suggests that these restrictions on direct trading reduced Chinese export growth considerably. Exports would have been 30 percent less and the export participation rate would have been 37 percent lower had there been no liberalization of trading rights. In addition, we compare the effects of different trade policies, namely export subsidies and subsidies on export costs. For export subsidies, it is better to target direct exporters over indirect ones, both for increasing the number of exporters and in terms of exports per dollar expended. However for cost subsidies, the opposite is true.