Discussion Paper Details

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Title: Made and Created in China: Super Processors and Two-way Heterogeneity

Author(s): Zhiyuan Chen, Aksel Erbahar and Yuan Zi

Publication Date: March 2020

Keyword(s): Heterogeneous Firms, processing trade and production networks

Programme Area(s): International Trade and Regional Economics

Abstract: This paper uses China's processing trade regime to examine firm performance and specialization within a production network. We show that there exists a special breed of firms that are active in both ordinary and processing exports, and are superior to other firms in multiple dimensions. Motivated by these "super processors," we document novel stylized facts on the interplay among exporters' performance, export mode, and brand ownership. We find that productivity and branding ability jointly shape firms' exporting activities. Based on these facts, we provide a general equilibrium model with endogenous production networks where firms are heterogeneous in both manufacturing and branding abilities. Testing our model's central prediction, we find that facilitating processing exports induces productive domestic downstream firms to establish their own trademarks. Our results highlight that processing trade not only leads goods to be "Made in China," but also "Created in China."

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Bibliographic Reference

Chen, Z, Erbahar, A and Zi, Y. 2020. 'Made and Created in China: Super Processors and Two-way Heterogeneity'. London, Centre for Economic Policy Research.