Three Essays on the Impacts of Trade Liberalization on Firms’ Behavior and Performance

Download or read book Three Essays on the Impacts of Trade Liberalization on Firms’ Behavior and Performance written by Yifan Li and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: "This thesis investigates the impacts of changes in the trading environment on the behavior and performance of exportingfirms and of firms that import intermediate inputs. The thesis consists of three essays. Each essay contributesboth a theoretical development and an empirical analysis, using large scaled micro data from multiple sources. Thefirst essay studies how increased import penetration of inputs affects firms’ optimal mark-up and industry concentration.A theoretical model is developed to show how firms, operating under monopolistic competition, may choose toincur a fixed cost of foreign sourcing in order to replace some domestically sourced input with more efficient foreignsubstitutes. It is shown that changes in variable trade costs not only affect firms’ importing decision but also thenumber and identity of firms in the market and ultimately markups and market structure. We find evidence of a positiverelationship between imported input penetration and markup: the average markup rises when import penetrationincreases following a reduction in trade costs. The second essay develops a two-stage theoretical model to investigatehow firms’ decision on the number of varieties to export (i.e., their export scope) depends on exchange rate volatilityand on other characteristics of the destination countries. In the model, in the first stage, multi-product firms decide ontheir optimal product scope (the number of varieties to be produced for exporting), incurring fixed investment costs.In the second stage, they decide on the export scope for each destination country, based on country-specific tradecosts and expectation of idiosyncratic exchange rate shocks. Firms reduce their export scope to destination countriesthat suffer negative demand shocks, but they cannot increase their export scope beyond the production scope that theyhave chosen in the first stage. Using Chinese customs transaction data, we are able to provide empirical evidence thatsupports the predictions of our theoretical model. The third essay studies the effect of foreign tariff reductions on the adjustment of average quality and export scope of multi-product exporting firms, using China’s firm-level microdata and highly disaggregated customs data from 2000 to 2006. We find that in response to tariff cuts in destinationcountries, exporting firms upgrade product quality and adjust export scope. Our finding provides a novel explanationof what the phenomenon called incomplete tariff pass-through. A fall in the tariff rate seems to be associated with anincrease in the tariff-inclusive prices, but this is because the price data has not been adjusted to reflect the increase inproduct quality"--