New KCG Study on Productivity Effects of Processing and Ordinary Export Market Entry

The ubiquitous “Made in China” label epitomizes China’s transformation from a virtual autarky in the 1970s to a veritable exporting powerhouse in little more than a generation. This transformation arguably owes much to the country’s ever-increasing integration in global value chains. This has undoubtedly been helped by policy. As early as the mid-1980s China introduced special “processing trade” schemes in an attempt to boost exports. The hallmark of this scheme is that there are tariff-exemptions on imported inputs as long as these are only processed in the country and then re-exported. Domestic sales of these processed goods are, in general, not permitted.

In the KCG Study published today, Prof. Sourafel Girma, Ph.D. (Nottingham University and KCG) and Prof. Holger Görg, Ph.D. (KCG, Kiel Institute and Kiel University) investigate what the effect of first-time entry into export processing is on subsequent firm performance in terms of total factor productivity. They also compare this with starting to engage in what is generally referred to as “ordinary exports”. The analysis was based on using a detailed Chinese firm-customs panel dataset and a recently developed econometric approach that allows for time varying “treatments”.

Their analysis finds economically and statistically significant positive causal effects of entering into export processing and ordinary export markets on subsequent firm level productivity. These productivity effects are shown to be larger than those accruing to firms who enter into ordinary exporting. Moreover, they find that the positive effects do not accrue similarly to all types of firms, but are strongest for those with low-to-medium productivity. Last but not least, export processors gain more when entering the industrialised North rather than the South, while this does not appear to matter much for ordinary exporting.

As one of the first in the related literature, their analysis shows that there are gains from engaging in export processing through learning-by-exporting at the firm level. This suggests that the policy of promoting export processing may bring gains with it, in particular for low productivity firms, and for those entering industrialised economies via exporting. Hence, firms that join global value chains through export processing are able to subsequently improve their performance.

The abovementioned paper “Girma, S. and Görg, H. (2021), Productivity Effects of Processing and Ordinary Export Market Entry: A Time-varying Treatments Approach, KCG Working Paper No. 23” is available here.

Contact:

Prof. Holger Görg, Ph.D. (KCG Managing Director): holger.goerg@ifw-kiel.de; +49(0)431-8814-258