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Productivity, Market Penetration and Allocation of Sales

Chen Zhe and Xiaonan Sun

No 2019-05, AGI Working Paper Series from Asian Growth Research Institute

Abstract: This paper investigates how firm productivity is associated with the sales allocation of Chinese exporters. We demonstrate that highly productive firms are less export oriented compared with less productive ones. This negative correlation between firm productivity and export intensity among exporters remains robust when we control firm ownership, factor intensity, and rule out impacts of processing trade. In order to rationalize our empirical findings, we extend the Arkolakis (2010) model to allow marketing cost elasticities to be heterogeneous across markets. A higher marketing cost elasticity domestically gives rise to a faster sales expansion in the home market as firm productivity grows. The fact that this negative correlation is more pronounced among firms who belong to advertising intensive industries supports the model predictions.Further evidence helps to rule out alternative explanations such as the effects of variable markup and product quality.

Keywords: Productivity; Marketing Cost; Export Intensity; Market Competition; F14; F23 (search for similar items in EconPapers)
Date: 2019-03
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