Worker Training, Firm Productivity, and Trade Liberalization: Evidence from Chinese Firms

Abstract

This paper discusses a novel mechanism—worker training—in relation to the effect of output trade liberalization on firm productivity. Using disaggregated Chinese firm‐level production data from 2004 to 2006, we find strong evidence that output trade liberalization boosts firm productivity. More importantly, after controlling for the firm's self‐selection in regards to investment in worker training, our extensive empirical research suggests the following findings. First, with fiercer import competition, firms experience a decrease in profitability and hence are less likely to invest in worker training. Second, less productive firms are more likely to train their workers, as otherwise they would collapse and exit from the market. The lower the firm productivity, the more is invested in the firm's worker training. Finally, the effect of output trade liberalization on firm productivity is more pronounced for firms with more training investment. Such results are robust regardless of various empirical specifications and different measures.