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Trade Liberalisation, Product Complexity and Productivity Improvement: Evidence from Chinese Firms


  • We thank Robert Feenstra, Joaquim Silvestre, Yang Yao, Linda Yueh, Robert Elliott, Tomohiki Inui, Zhigang Li, Fredik Willhelmsson, Jiegen Wei and Douglas Campbell for their helpful comments and constructive suggestions. We thank participants at the seminar at Gothenburg University, Sweden, Conference on Microeconomics Drivers of Growth in China, held by the University of Oxford, the 7th Korea and World Economy (2008), the 3rd China’s New Political Economy Symposium, the 2008 International workshop on Chinese Productivity for their useful comments and suggestions. Grants provided by the Beijing Municipal Government, China (Project No. XK100010501), and National Natural Science Foundation of China (Project No. 71001030 and No. 71273270) are gracefully acknowledged. We thank the excellent research assistance from Wei Tian, Jianfeng Shan, Zhe Yuan and Lingyun Zhang. However, all errors are our own.


This paper investigates the impact of trade liberalisation on firm productivity by using both Chinese manufacturing firm-level data and highly disaggregated Chinese import data from 1998 to 2002. We construct a measure of firms’ total factor productivity by adopting an augmented Olley–Pakes semi-parametric methodology to correct the simultaneity bias from reverse causality and selection bias from firms’ exits. Even when controlling for the endogeneity, trade liberalisation increases productivity for firms that produce complex goods (highly differentiated products). In contrast, we found that trade liberalisation has an opposite effect on the productivity of the producers of simple goods. Moreover, the effect of trade liberalisation on exporting firms is found to be smaller than that on non-exporting firms. Our main results are robust to the use of different econometric methods.