What Drives Chinese Firms' Export Sophistication? A Perspective from the Rise of Minimum Wages

• Published date: 01 March 2022
• Author: Xiaoping Li,Shuzhou Peng,Wei‐Chiao Huang,Qian Zhou
• Date: 01 March 2022
• DOI: http://doi.org/10.1111/cwe.12409

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 28–59, Vol. 30, No. 2, 2022

28

What Drives Chinese Firms’ Export Sophistication?

A Perspective from the Rise of Minimum Wages

Xiaoping Li, Shuzhou Peng, Wei-Chiao Huang, Qian Zhou*

Abstract

This paper re-examines the driving factors behind the upgrading of China’s export

sophistication. Based on county-level minimum wages and firm-level export data for

2000–2013, this paper fi nds that the labor cost shocks caused by rising minimum wages

have a signifi cant positive impact on Chinese fi rms’ export sophistication. Channel tests

show that the positive effect of rising minimum wages on firms’ export sophistication

derives from the exit of less sophisticated products and the reallocation of the relative

share of surviving products, rather than introducing new highly sophisticated products.

Heterogeneity analysis reveals that rising minimum wages have a greater impact on

export sophistication for low-wage fi rms, domestic fi rms, and labor-intensive fi rms. This

paper has implications for developing countries regarding the transition from a low-cost

labor trade model to a sophistication-driven trade model.

Keywords: Chinese fi rms, export sophistication, minimum wages

JEL codes: F12, F249, J3

I. Introduction

Export sophistication is critical for a country’s future growth rate and pattern (Hausmann et al.,

2007). Since the turn of the 21st century, China’s export sophistication has been rising

rapidly, which has attracted widespread attention from analysts and scholars (Rodrik, 2006;

Schott, 2008; Amiti e t al., 2010). As shown in Figure 1, proportion of China’s low-tech

manufacturing exports fell from 43.88 percent in 2000 to 29.09 percent in 2013, and

the high-tech ones rose to 36.72 percent in 2013. This is a clear indication that China’s

exports have shifted rapidly to be more sophisticated. What factors are driving the rapid

*Xiaoping Li, Professor, Economics School, Zhongnan University of Economics and Law, China. Email:

chineselixp@126.com; Shuzhou Peng (corresponding author), PhD Candidate, Economics School, Zhongnan

University of Economics and Law, China. Email: pszzuel@163.com; Wei-Chiao Huang, Professor, Department

of Economics, Western Michigan University, US. Email: huang@wmich.edu; Qian Zhou, Associate Professor,

Economics School, Zhongnan University of Economics and Law, China. Email: Z0005072@zuel.edu.cn. The

authors acknowledge fi nancial support from the National Social Science Foundation of China (No. 18ZDA038).

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Chinese Firms’ Export Sophistication29

growth of China’s export sophistication? The traditional view holds that international

technology spillover caused by processing trade and FDI are important reasons for

increasing export sophistication (Branstette r and Lardy, 2006; Xu and Lu, 2009;

Wang and W ei, 2010; Zhang and Chen, 2020). Adding to conventional wisdom, this

paper attempts to examine a relatively less-explored factor in the context of the Chinese

domestic system: the rise in minimum wages.

Figure 1. Changes in China’s export structure, 2000–2013

Source: Calculated b y authors based on Centre d’Etudes Prospectives d’Informations Internationales–Base

pour l’Analyse du Commerce Internationales (CEPII–BACI) database from 2000 to 2013.

Note: The product classifi cation is provided by Lall (2000).

Minimum wages are widely used in many countries as a tool for protecting workers’

income rights or as a way of producing higher wages. With the rapid growth of China’s

economy in the early 21st century, China’s minimum wage system has been improved

continuously, and minimum wage changes have occurred with large amplitudes in each

area. For instance, during 1997–2013, the average monthly minimum wage across

China increased by about 253.3 percent, from RMB211.7 to RMB747.9.1 The dramatic

changes in minimum wages have made China the most representative sample in recent

years for studying the effect of rising minimum wages on fi rms’ production or export

decisions (Gan et al., 2016; Mayneris et al., 2018; Hau et al., 2020).

How do minimum wage increases affect fi rms’ export sophistication? Theoretically,

the determinants most directly related to export sophistication are the factor endowment,

1Authors’ calculations based on Chinese county-level minimum wages data from 1997 to 2013.

Xiaoping Li et al. / 28–59, Vol. 30, No. 2, 2022

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

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such as capital, labor, and technology. Changes in minimum wages would affect low-

income workers and indirectly affect high-income workers, causing the wage distribution

to change and impacting the fi rm’s marginal labor costs (Burdett and Mortensen, 1998;

van den Berg and Ridder, 1998). In response, fi rms make adjustments in their production

and export behavior. Specifi cally, minimum wage increases change the relative prices of

production factors. When there is substitutability between the labor and capital factors,

the rise in labor costs would induce fi rms to substitute capital factors for labor factors

to save total costs (Hicks, 1963; Broadberry and Gupta, 2006), such as increasing

capital investment and importing automation equipment from abroad. More capital

or high-end equipment would support fi rms in improving production technology (Bas

and Berthou, 2017). However, some researchers hold the opposite views. They argue that

when there is a lack of substitutability between labor and capital factors, rising labor costs

will hinder technology upgrading because higher wages would reduce profi tability and

lead to lower employment and the scarcity of labor resources (Romer, 1990; Jones, 1995;

Howitt, 1999). To reconcile the opposing views, Acemoglu (2010) suggests that the

relationship between labor cost and technological advances can vary across periods

and countries. Nonetheless, Li et al. (2020) argue that, in comparison with developed

countries, the increased labor costs in China are more likely to foster capital investment

and technological upgrading because China has a larger share of employment in routine

occupations, which are easier to be substituted by labor-saving automation due to capital

investment or high-end equipment. If so, minimum wage increases might induce capital

factor accumulation and technology upgrading through factor substitution effects, thus

driving Chinese fi rms’ export sophistication by expanding highly sophisticated products

or reducing less sophisticated products.

Based on the above facts and theories, this paper uses a rich micro-level panel

dataset of Chinese manufacturing firms to investigate the relationship between the

increase in labor costs refl ected by changes in minimum wages over time and Chinese

firms’ export sophistication. The dataset we use contains comprehensive information

on fi rm-level and macro-level variables, allowing us to control for fi rm-level variables,

time effects, unobserved firm heterogeneity, and changes in different local economic

indicators.

Our estimation results indicate a statistically signifi cant positive correlation between

minimum wages and firms’ export sophistication. This result is generally robust to

alternative measurement and estimation methods. We also check the potential channels

through which minimum wages affect fi rms’ export sophistication. The results indicate

that the labor cost shock caused by minimum wage increases can prompt firms to

abandon some labor-intensive (less sophisticated) products in the export market. There