Importing exporters and exporting importers: A study of the decision of Chinese firms to engage in international trade

• Date: 01 February 2019
• Author: Liyun Zhang,Nicholas J. Horsewood,Robert J.R. Elliott
• Published date: 01 February 2019
• DOI: http://doi.org/10.1111/roie.12374

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© 2018 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/roie Rev Int Econ. 2019;27:240–266.

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INTRODUCTION

In a world where globalization is under threat from a renewed interest in protectionist policies it is

important to understand what drives the exporting and importing behavior of firms and whether these

activities are complementary or are substitutes. The existing literature has tended to concentrate on

exporting and shows that exporters tend to outperform non exporters in terms of productivity, capi-

tal intensity, skilled labor intensity, size and financial health (Bernard & Jensen; 2004; Greenaway,

Guariglia & Kneller, 2007; Lawless, 2009; Van Biesebroeck, 2005). Central to this literature is the

identification of factors that determine a firm’s decision to export, with a number of studies identify-

ing sunk‐entry costs and various firm characteristics as important determinants of exporting behavior

(Das, Roberts & Tybout, 2007; Greenaway & Kneller, 2008; Impullitti, Irarrazabal & Opromolla,

2013; Manez, Rochina‐Barrachina & Sanchis, 2008).1

Received: 25 March 2016

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Revised: 21 June 2018

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Accepted: 26 June 2018

DOI: 10.1111/roie.12374

ORIGINAL ARTICLE

Importing exporters and exporting importers: A

study of the decision of Chinese firms to engage in

international trade

Robert J. R. Elliott

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Nicholas J. Horsewood

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Liyun Zhang

Department of Economics,University of

Birmingham, Birmingham, UK

Correspondence

Robert J. R. Elliott, Department of

Economics, University of Birmingham,

Birmingham, UK.

Email:r.j.elliott@bham.ac.uk

Funding information

ESRC, Grant/Award Number:

RES‐000‐22‐3959

Abstract

This paper examines the complex and interdependent rela-

tionship between importing and exporting for a panel of

Chinese manufacturing firms. We estimate the decision to

import and export simultaneously within a dynamic ran-

dom‐effects bivariate probit framework addressing the en-

dogenous initial conditions problem. Results show that

decisions to export and import are simultaneously deter-

mined and that sunk-entry costs play a significant role in a

firm’s decision to enter international markets. Costs are

larger for exporting. We also find a substitution effect be-

tween the two decisions. The substitutability between ex-

porting and importing is greater for financially constrained

private firms.

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ELLIOTT et al.

In contrast, relatively little attention has been given to explain the decision of firms to import.

More general papers on importer behavior include MacGarvie (2006), Kugler and Verhoogen (2009),

Chen and Ma (2012), Augier, Cadot and Dovis (2013), Cadot, Carrere and Strauss‐Kahn (2014), and

Halpern, Koren and Szeidl (2015). The results of these and other papers show that importers tend to

share many of the same characteristics as exporters in that they are larger (importers are generally

larger than exporters), more productive and more capital‐ and skill‐intensive than non traders. In

addition, there are a small number of papers that study importing and exporting simultaneously (a sig-

nificant number of exporters also import intermediate inputs) that show that these so‐called two‐way

traders are even larger, more productive and more capital‐ and skill‐intensive than firms that only ex-

port or only import (Aristei, Castellani, & Franco, 2013; Bernard, Jensen, & Schott, 2009; Castellani,

Serti, & Tomasi, 2010; Kasahara & Lapham, 2013; Manova & Zhang, 2009; Muuls & Pisu, 2009).2

Central to this paper is the observation that access to intermediate inputs from abroad increases

both the probability of exporting and the number of export destination countries (Bas, 2012; Bas &

Strauss‐Kahn, 2014; Fugazza & McLaren, 2014)). The argument is that a firm will face lower sunk‐

entry costs to exporting if it is already an importer especially if the imports are sourced from the target

export destination country. In this case, the firm is likely to be, for example, more familiar with that

country’s language and culture and may be able to exploit existing distribution channels and previ-

ously developed networks. Similarly, existing exporters should also find it easier to begin an importing

relationship because of similar trade externalities/complementaries that lower the sunk‐entry costs of

importing. The potentially complex and interdependent relationship between importing and exporting

means that estimations that fail to take into account the influence of existing trade channels on the

decision to participate in further international trade may bias (overstate) the size of sunk costs of entry

for that particular channel.

Following Melitz (2003) and Bernard and Jensen (2004), a number of theoretical models and

empirical studies have suggested that decisions to export and import are state dependent and that

persistence in exporting and importing may be due to the large costs to individual firms of entering

foreign markets (Aeberhardta, Buonob & Fadinger, 2014; Campa, 2004; Kaiser & Kongsted, 2008;

Kasahara & Lapham, 2013; Timoshenko, 2015). These costs can be categorized into upfront sunk

costs (e.g., finding reliable buyers/suppliers and establishing distribution channels) and fixed costs

(e.g., contracting costs, transportation costs, and customer service costs). Sunk costs are assumed to be

incurred before a firm enters a foreign market and hence cannot be recovered whether the firm remains

or subsequently exits the market.3

In this paper we revisit the literature on the internationalization decision of firms employing a

large dataset of manufacturing firms for China between 2002 and 2006 that contains rich information

on a range of different firm characteristics and international trade activities. China is also central to

current global trade patterns when it overtook the United States as the world’s largest trader (WTO).4

China has attracted particular interest given its rapid growth of international trade. A number of recent

papers examine the export behavior of Chinese firms (Lu, 2010; Yang & Mallick, 2010; Yi & Wang,

2012). Although there are also a number of papers that consider the performance of Chinese importers

(Elliott, Jabbour & Zhang, 2016; Manova & Zhang, 2009; Wang & Yu, 2012) there is only limited

research that has been done on the importing decision of firms. Although Fan, Li and Yeaple (2015)

and Feng, Li and Swenson (2016) link the two sides of international trade in studies of manufacturing

firms in China, their focus is on how imported inputs affect export performance.

More specifically, we make the following contribution. First, rather than focusing on only one side

of a firm’s internationalization strategy (exporting or importing), we estimate the probability of a firm

engaging in both importing and exporting jointly, controlling for the effects of any previous trading

relationship (exporting or importing). In doing so we are examining whether importing and exporting