Market potential, firm exports and profit: Which market do the Chinese firms profit from?

•We address the effects of market potential on the Chinese firms' exports and profit.•International market potential promotes firms' export activities, but has negative effects on firm profit.•The Chinese firms' profit mainly stems from the domestic market.•The adverse impact of international market potential on firm profit diminishes with the increase of firm productivity.

This paper examines the effects of market potential on Chinese firms' exports and profit by using data from the Chinese industrial enterprise database and The China City Statistical Yearbooks during 1998-2007. We find that international market potential has positive effects on firm exports, but negative effects on firm profit, while domestic market potential has opposite impacts. This finding suggests that Chinese firms' profit mainly stems from the domestic market. Moreover, the adverse impact of international market potential on firm profit diminishes with the increase of firm productivity, and some firms with higher productivity may benefit from the expansion of foreign markets.