Mechanism And Empirical Study On Home Market Effect Of Chinese Manufacturing Industries Exports

Thanks to35years of reform and opening up, the economy of China has achieved sustained rapid growth and has become the second largest economy. Importsand exports make great contribution to the economic development. Huge progressin the development of international trade makes China to be the world’s largest exporter of goods. In international trade, manufacturing accounts for the vast majority of exports, so China has become the “world’s factory” and “manufacturing country”. But after the2008financial crisis, China saw the increasingly complex andsevere situation in international trade, export-driven economy will face more uncertainty in the outside world, so the Chinese economy needs to find a new growthpoint. So, we have to ask the current policy of expanding domestic demand, is external demand good to fill it? Does domestic and external demand have contradictory relationship? Is the export-driven economy out of date? In international trade,is there any other theory to supply the theory of comparative advantage theory?As the labor costs have increased today, where is the new growth point of Chinese manufacturing? What is the impact of expanding domestic demand on the structure of exports of manufacturing? The paper studies the Home Market Effect theory and explores the relationship between domestic demand and external demand on manufacturing to answer the questions above.Home Market Effect refers to a country with larger domestic demand will become the exporter of differentiated products in the world with economies of scaleand costs of transport. Home Market Effect is originally （1980） proposed by Krugman, which explained the intra-industry trade. It is good complement to the theory of comparative advantage which explained inter-industry trade. It means that under certain conditions, There is a positive correlation between domestic and external demand. If China has the Home Market Effect on manufacturing, then Chinese international trade will no longer be confined to comparative advantage. So studying the local market has very important significance on the internationl trade andpolicy guidance.Firstly, the paper starts with the status of Chinese international trade, which indicats the importance of studying on the Home Market Effect, and summaries the theoretical and empirical research. Then, through the mechanism and empirical r esearch, the paper analyses and proves the effect on manufacturing of the HomeMarket Effect. The mechanism study is mainly made by economies of scale, transportation costs, product differentiation, total factor productivity. Empirical researchis going to learn and expand linear research model of Weder（2003）, selecting nine sectors on manufacturing in two countries to test the Home Market Effect. Thepaper chooses China, Brazil and India and their time-series data. The results show that five sectors have Home Market Effect in China and India. Power generation machinery and equipment is in the first row. The other transportation equipmentindustry is the second. Four sectors have Home Market Effect in China and Brazil. Power generation machinery and equipment is the first and the other transportation equipment industry is the second. Then this paper tries to explain the reasons. Finally, according to the results, the paper presents some relevant policy recommendations.