The Role of Firm Factors in Demand, Cost, and Export Market

In this paper we use micro data on both trade and production for a sample of large Chinese manufacturing firms in the footwear industry from 2002-2006 to estimate an empirical model of export demand, pricing, and market participation by destination market. We use the model to construct indexes of firm-level demand, marginal cost, and fixed cost. The empirical results indicate substantial firm heterogeneity in all three dimension with demand being the most dispersed. The firm-specific demand and marginal cost components account for over 30 percent of market share variation, 40 percent of sales variation, and over 50 percent of price variation among exporters. The fixed cost index is the primary factor explaining differences in the pattern of destination markets across firms. The estimates are used to analyze the supply reallocation following the removal of the quota on Chinese footwear exports to the EU. This led to a rapid restructuring of export supply sources on both the intensive and extensive margins in favor of firms with high demand and low fixed costs indexes, with marginal cost differences not being important.

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