Foreign demand shocks, product switching, and export product quality: Evidence from China

Using Chinese customs data spanning from 2000 to 2013, we explore how foreign demand shocks in exporting markets impact product switching, factor adjustments, and export quality of Chinese exporting firms. We document that positive demand shocks would render firms to expand product scope by increasing the number of added varieties and decreasing the number of dropped varieties. In line with the expansion of product scope, firms adjust their factor reallocations by hiring more employees and producing in a more capital‐intensive way when facing higher positive demand shocks. Higher capital intensity induces productivity improvement, and thus increases firms' export revenue, export price, and export‐product quality. We also document that positive foreign demand shocks render firms to concentrate less on their core varieties by skewing their export sales away from the best performing products.