Export Market Diversification and Firm Productivity: Evidence from a Large Developing Country

• Chinese firms’ behavior in the export markets is highly heterogeneous.
• There is a U-shaped relationship between the diversification of export markets and productivity.
• Convex relationship is explained by a learning curve, economies of scope, and economies of scale.
• The convex, U-shaped relationship is less pronounced for firms engaged in processing trade.
• The results are robust to the potential endogeneity and different specifications.

SummaryThis paper first provides information on the distribution of Chinese firms’ export destinations. It then examines the relationship between firms’ export market diversification and their productivity by using trade and production data from the Customs Trade Statistics and the Annual Survey of Industrial Firms in China from the years 2000 to 2006. We check the robustness of the results by controlling for potential endogeneity and estimating various specifications. We find that there is a U-shaped relationship between the diversification of export markets and firm productivity. As firms begin to export, they face higher costs (and thus lower productivity) initially because they lack the knowledge and experience. Eventually, as diversification of the export market moves beyond a threshold level and investments cumulate, export market expansion results in lower long-run average costs and thus higher productivity owing to the learning curve and economies of scope, as well as economies of scale. This U-shaped relationship, however, is less pronounced for firms with higher share of intermediate products in total exports, for firms engaged in processing trade, and for firms exporting to Hong Kong. The results have significant implications for firm export dynamics and behavior, and can help target policies that will boost the performance of the firms. They are significant for policy makers who have emphasized the importance of export diversification for mitigating the impact of global shocks.