Pure Exporter: Theory and Evidence from China

• Author: Yi Lu,Jiangyong Lu,Zhigang Tao
• Date: 01 September 2014
• DOI: http://doi.org/10.1111/twec.12108
• Published date: 01 September 2014

Pure Exporter: Theory and Evidence from

China

Jiangyong Lu

1

,YiLu

2

and Zhigang Tao

3

1

Peking University, Beijing, China

2

National University of Singapore, Singapore, and

3

University of

Hong Kong, Hong Kong

1. INTRODUCTION

IN the past decade, there has been a growin g literature on firm heterogeneity and exporting

behaviour. A dominant theoretical explanation is that more productive firms self-select to

become exporters (e.g. Melitz et al., 2003). Specifically, in Melitz’s framework, there is a fixed

cost of production and a fixed cost of exporting, but no fixed cost of selling in the domestic mar-

ket. As a result, in equilibrium, there are only two types of firms: less productive firms sell only

in the domestic market, while more productive firms have both domestic sales and export.

1

In reality, however, there are firms exporting all of their output (called pure exporters). For

example, McMillan and Woodruff (1999) report that in their sample of firms in Vietnam, as

high as 9 per cent of them exports all of their production. Meanwhile, from a sample of Chi-

nese manufacturing firms for the period of 1998–2005, we find that nearly 3 per cent of firms

(17 per cent of exporters) are pure exporters. How to explain the existence of pure exporters?

And what kinds of firms choose to become pure exporters? In this paper, we offer a theoreti-

cal explanation for pure exporters and then test the theoretical predictions using a data of Chi-

nese manufacturing firms.

In our theoretical analysis, we build upon Melitz (2003)’s framework by relaxing its key

assumption about fixed cost of selling. Instead of assuming that there is no fixed cost of sell-

ing in the domestic market but a fixed cost of exporting, we assume that there is also a fixed

cost for domestic sales albeit lower than that of exporting. Under such framework, we have

the same results as in Melitz (2003) when the export market is not sufficiently large, that is,

there are just two types of firms in equilibrium with the more productive firms having both

domestic sales and export while the less productive firms selling only in the domestic market.

However, when the export market is sufficiently large, there are three types of firms in equi-

librium: firms having both domestic sales and exports are the most productive, followed by

pure exporters, and finally by firms with domestic sales only.

The intuition for our theoretical results is as follows. The profit functions for the three

types of firm are similar, that is, a linear function of firm productivity, and the two key vari-

ables generating different profits across the three types of firm are the intercept (which is

determined by the fixed costs of operations) and the slope (which is determined by wage rate

and market size). First, the three types of firm differ in the fixed costs of operations

We thank the editor and two anonymous referees for comments and suggests, Amber Li for sharing us

the ASIF-Customs matched data. The first author acknowledges research supports from National Science

Foundation of China (#71172020; #71132002).

1

Existing empirical studies only include a dummy indicating whether or not a firm exports without dis-

tinguishing pure exporters from exporters that also have domestic sales (see for example, Clerides et al.,

1998; Bernard and Jensen, 1999).

©2014 John Wiley & Sons Ltd 1219

The World Economy (2014)

doi: 10.1111/twec.12108

The World Economy

(including both production and sales): firms with both domestic sales and export have the

highest fixed costs, followed by pure exporters, and finally by firms with domestic sales only.

Second, as wage rate is the same across the three types of firms (because production takes

place in the same country), the variations in the slope variable come from the differences in

market size, with a bigger market size leading to a steeper slope.

It is clear that firms with both domestic sales and export have the steepest slope among

the three. However, the ranking in the slope between firms with domestic sales only and

firms with export only depends on the relative size of the domestic market vis-

a-vis the

export market. When the export market is sufficiently larger than the domestic market, firms

with both domestic sales and export have the steepest slope, followed by pure exporters, and

finally by firms with domestic sales only. Combined with the ranking in fixed costs of opera-

tions, it follows that firms having both domestic sales and exports are the most productive,

followed by pure exporters, and finally by firms with domestic sales only. However, when

the export market is not sufficiently large, firms with domestic sales have a steeper slope than

pure exporters, and they dominate pure exporters as they also enjoy lower fixed costs of

operations. Hence, in equilibrium, there are only two types of firms, with the more productive

firms having both domestic sales and export while the less productive firms selling only in

the domestic market.

Next, using the data set of Chinese manufacturing firms, we compare the three types of

firms in terms of productivity. Preliminary statistics reported in Table 1 show that firms hav-

ing both domestic sales and export always have the highest rank among the three types of

firms in terms of employment, fixed assets, output and productivity.

2

On the other hand, firms

with domestic sales have the lowest ranking except in the category of fixed assets. For further

empirical analysis, we regress firm productivity on a dummy variable for domestic sales only,

and a dummy variable for domestic sales and exports, together with a list of industry, region

and year dummies. Regression results show that firms with domestic sales and exports have

the highest productivity, followed by pure exporters, and finally by firms with domestic sales

only, consistent with our theoretical predictions.

These results are robust to the exclusion of outlying observations, to the inclusion of other

firm characteristics (such as firm size, capital intensive and skill labour intensity), an alterna-

tive classification of Chinese domestic firms, two subsamples (i.e. before and after WTO

accession in 2002) and two alternative estimation methods (i.e. ordered Probit and multino-

mial logit). In particular, there are concerns that our finding of the sorting pattern among dif-

ferent types of firms may be driven by the special trading regime in China. Specifically, in

China, there are many firms that are allowed to import their inputs freely but have to sell all

their outputs to foreign markets (namely processing trader). Meanwhile, many exporter s are

located in export processing zones (like Shenzhen, Zhuhai, Shantou), which have different

policies and regulations about importing and exporting. Moreover, pure exporters may spe-

cialise in different foreign markets than those operating in both domestic and foreign mar-

kets, and hence, our productivity measure may reflect rather the differences in export market

conditions (Melitz et al., 2012). To see whether our results are driven by these alternative

explanations, we use the ASIF-Customs matched data, from which we observe whether an

2

Here, we estimate the total factor productivity using four different methodologies, that is, ordinary

least squares (OLS), fixed effect, generalised method of moments (GMM) and Levinsohn and Petrin

(2003). Details of these estimations are presented in Section 3.

©2014 John Wiley & Sons Ltd

1220 J. LU, Y. LU AND Z. TAO