Trade Liberalization, Product Complexity, and Productivity Improvement: Evidence from Chinese Firms

Abstract

This paper investigates the impact of trade liberalization on firm productivity by using both Chinese manufacturing firm-level data and highly disaggregated Chinese import data from 1998-2002. We construct a measure of firms’ total factor productivity (TFP) by adopting an augmented Olley-Pakes (1996) semi-parametric methodology to correct the simultaneity bias from reverse causality and selection bias from firms' exits. Even when controlling for the endogeneity, trade liberalization increases productivity for firms that produce complex goods (highly differentiated products). In contrast, we found that trade liberalization has an opposite effect on the productivity of the producers of simple goods. Moreover, the effect of trade liberalization on exporting firms is found to be smaller than that on non-exporting firms. Our main results are robust to the use of different econometric methods.