Cost and Product Advantages: Evidence from Chinese Manufacturing Firms

Jordi Jaumandreu and Heng Yin

No 11862, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Productivity; Cost advantages; Demand heterogeneity; Product advantages (search for similar items in EconPapers)
JEL-codes: C33 D24 L11 O30 O47 (search for similar items in EconPapers)
Date: 2017-02
New Economics Papers: this item is included in nep-bec, nep-eff, nep-int and nep-tra
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Citations: View citations in EconPapers (2)

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