DP14486 Made and Created in China: Super Processors and Two-way Heterogeneity

Author(s): Zhiyuan Chen, Aksel Erbahar, Yuan Zi
Publication Date: March 2020
Date Revised: March 2020
Keyword(s): Heterogeneous Firms, processing trade, production networks
JEL(s): F1, F12, F13, F14, L11, L21
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14486

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."