Two essays in empirical industrial organization and international trade

Abstract

My thesis explores how international trade and transportation networks influence firm performance and market dynamics. I examine firms' heterogeneity in the production, supply chain, and sales market by extending traditional methods from the literature on empirical industrial organization. I have found that both exporting and the development of transportation networks significantly enhance firm performance, providing new insights into firm dynamics.

The first chapter is about how international trade affect the firms' performance. The productivity effect of exports has been the foundation for many trade-related policies. However, empirical studies usually find a mixed effect of exports on productivity. We show that increasing returns to scale and markup are two important sources of gains from exports, in addition to the productivity effect. Because output prices are typically unavailable in most micro-data sets, we develop a new method to consistently estimate firm-level markup, productivity, and returns to scale jointly, using the widely available revenue and input expenditure. We find that export has substantial efficiency gains, half of which is contributed by increasing returns to scale and the other half by export's productivity premium. The improved efficiency allows exporters to charge a higher markup but at a lower price. Taken together, exports increase the firm's profits by about a quarter in the Chinese manufacturing industry; they also benefit consumers by reducing prices. Increasing returns to scale also provides an explanation for why TFPR may fail to capture the export premium.

The second chapter is about how transportation construction, an important factor reduces trade cost, affects the firms' performance and how the it drives the integration of domestic regional markets. By introducing the Input-Output linkage into the traditional market access measurements and extending the traditional estimation method for estimating firms' heterogeneity, we uncover micro-level evidence of the channels through which the transportation network influences firms' performance and promotes market integration. We find that the increases in upstream and downstream market access benefit firms in terms of higher productivity/markup and lower input price. Meanwhile, more fierce market competition brought by the connection to the expressway network reduces firms' markup and raises the input price, but these negative effects are dominated by the positive effects of increased market access. Overall, the development of Chinese expressways during 1998--2007 contributes to approximately 40% increase in firms' productivity, 17% decrease in firms' input price, and 1.7% increase in firms' markup. Moreover, we find that those firms that initially perform worse benefit more from the developments of the expressway network, which leads to up to 15% convergence of firms' performance.