The Role of Firm Factors in Demand, Cost, and Export Market Selection for Chinese Footwear Producers

In this paper we use micro data on both trade and production for a sample of large Chinese manufacturing …rms 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 …rm-level demand, marginal cost, and …xed cost. The empirical results indicate substantial …rm heterogeneity in all three dimension with demand being the most dispersed. The …rm-speci…c 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 …xed cost index is the primary factor explaining di¤erences in the pattern of destination markets across …rms. 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 …rms with high demand and low …xed costs indexes, with marginal cost di¤erences not being important.