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Determinants of Developing Countries' Export Upgrading: The Role of China and Productive Investment

Yue Teng and Dic Lo
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Yue Teng: School of Social Sciences, University of Trento and University of Florence, Italy
Dic Lo: Department of Economics, SOAS University of London, UK

No 227, Working Papers from Department of Economics, SOAS, University of London, UK

Abstract: This paper explores the determinants of developing countries' export upgrading measured by export sophistication. In particular, as a response to the recent debate on China's impact on developing countries' industrialisation, we examine a new hypothesis that the considerable growth in developing countries' trade with China may serve as a source of productive investment for their export upgrading. Dynamic panel estimations based on HS 6-digit export data on 62 developing countries during 1995-2014 show the positive effects of human capital, productive investment, and absolute gains from trade with China measured by income terms of trade vis-®§-vis China. Mediation analysis finds that the positive effect of trade with China on export upgrading takes effect largely through its enhancing effect on productive investment, which supports our hypothesis. By contrast, China's direct export-downgrading impact is minor. Our findings suggest that, for developing countries, China serves more as a stimulator of capital accumulation for industrial development than a competitor in manufacturing market or a predator of natural resources. This provides an alternative to the widespread argument of China's crowding-out and re-primarisation impact on developing countries. The priority for developing countries is therefore the appropriate use of the gains from trade for productive purposes.

Keywords: export sophistication; developing countries; China; terms of trade; productive investment (search for similar items in EconPapers)
JEL-codes: F14 F63 O14 O19 O25 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cna, nep-dev, nep-int and nep-tra
Date: 2019-09
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