Demand, Cost, and Profitability Across Chinese Exporting Firms

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, cost, and export market profitability. The empirical results indicate substantial firm heterogeneity in both the demand and cost dimensions with demand being a more important determinant of the across-firm differences in export market profitability. Our measure of the firm-specific component of export profitability is very useful in distinguishing between firms based on the length of time they export to a destination. Firms that are long-term exporters in a destination have a higher profitability index, on average, than firms that do not export to the destination. We use the estimates to analyze the reallocation resulting from removal of the quota on Chinese footwear exports to the EU and find that it led to a rapid restructuring of export supply sources in favor of firms with high demand and low cost indexes.