Trading Partners, Traded Products, and Firm Performances: Evidence from China’s Exporter-Importers

In this study we explore a newly available unique dataset that links China’s international trade transactions to a comprehensive firm-level data in China’s manufacturing sector, and establish a number of interesting stylized facts linking firms’ key economic performance to their exporting-importing behaviour. One novelty of our analysis is we distinguish between ordinary trade and processing trade; the latter involves importing inputs and materials to be assembled and re-exported to the overseas market. Several novel patterns emerge. First, we discover significant heterogeneity within two-way traders – in terms of size, productivity and factor intensity – depending on their engagement in processing exports/imports. Whilst the existing literature typically finds that two-way traders are larger and more productive than one-way traders, we show that pure processing two-way traders are actually the least productive and exhibit the lowest capita/skill intensity compared to one way traders. By contrast, firms conducting both ordinary and processing trade are the largest, most productive and capital intensive among all trading firms. Second, consistent with the market hierarchy hypothesis, larger and more productive firms trade with a larger number of trade partners with tougher market conditions characterized by longer distances and smaller market size. Remarkably, this pattern is highly symmetric between exports and imports, as well as ordinary and processing trade. Third, firms with greater capital and skill intensities source their inputs from countries with higher income per capita, and this pattern holds only for ordinary imports but not processing imports. Fourth, larger firms trade a larger number of products with greater average product complexity as proxied by Nunn’s contract intensity measure. Fifth, controlling firm size, more productive and capital intensive firms export less complex products but import more complex ordinary inputs. Whilst some of the above findings confirm existing stylized facts reported for other countries, some patterns we discover are new to the literature and remain to be reconciled with the heterogeneous firm trade theory.