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Cost and Product Advantages: Evidence from Chinese Manufacturing Firms

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  • Jaumandreu, Jordi
  • Yin, Heng

Abstract

We use data on 70,000 Chinese manufacturing firms that sell domestically and export to robustly estimate the joint distribution of unobserved productivity (cost advantages) and unobserved demand heterogeneity (product advantages) from 1998 to 2008. Product advantages show a trade off with cost advantages and are positively related to observed costs. Using the advantages we characterize Chinese manufacturing, that grew competing more on costs than in product advantages (which account for a significant but small 24% of growth). Our estimation highlights important biases affecting the estimates of the coefficients of the production function, demand elasticities and markups, when heterogeneity of demand or its correlation with productivity are ignored. With the separation of cost and product advantages, we revisit and reinterpret recent studies to find new results which change their policy consequences.

Suggested Citation

  • Jaumandreu, Jordi & Yin, Heng, 2017. "Cost and Product Advantages: Evidence from Chinese Manufacturing Firms," CEPR Discussion Papers 11862, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11862
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    References listed on IDEAS

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    1. Marc J. Melitz & Sašo Polanec, 2015. "Dynamic Olley-Pakes productivity decomposition with entry and exit," RAND Journal of Economics, RAND Corporation, vol. 46(2), pages 362-375, June.
    2. Brandt, Loren & Van Biesebroeck, Johannes & Zhang, Yifan, 2012. "Creative accounting or creative destruction? Firm-level productivity growth in Chinese manufacturing," Journal of Development Economics, Elsevier, vol. 97(2), pages 339-351.
    3. Olley, G Steven & Pakes, Ariel, 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry," Econometrica, Econometric Society, vol. 64(6), pages 1263-1297, November.
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    Cited by:

    1. Shengyu Liu & Heng Yin, 2017. "A Structural Method to Estimate Firm-level Capacity Utilization and Application to Chinese Heavy Industries," Annals of Economics and Finance, Society for AEF, vol. 18(1), pages 1-28, May.
    2. L. Kamran Bilir & Eduardo Morales, 2016. "Innovation in the Global Firm," NBER Working Papers 22160, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    Productivity; Cost advantages; Demand heterogeneity; Product advantages;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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