Opening Up, Market Size Ang Quality Of Imported Intermediate Products

In today’s world, with the in-depth development of economic globalization, the deepening of the international industrial division of labor and cooperation, the nations of the world’s economic ties and interdependent reached unprecedented degree, the whole world economy has increasingly become an organic unity, the open world calls for the China open.From the national level, China’s opening policy is not only open the domestic market for other countries, but also seek greater abroad market for Chinese enterprises; and from the regional level, China’s opening policy will reduce regional economic barriers, promote the regional market integration, thus Chinese companies can get bigger domestic market scale. As a result, China’s opening policy will make Chinese companies face a bigger domestic market scale, but also win a larger market abroad. Further, with the growing size of the market, there will be more companies to enter this market, provide consumers with more quality differentiation product categories, this will undoubtedly make a tougher competition in the market. In order to cope with fierce competition, the enterprise must improve the quality of the final products, under this competition effect, companies will tend to use higher quality intermediate inputs. The open policy will affect the size of the market, and then work on the skew of the quality of the enterprise import of intermediate products.This paper is trying to build a theoretical model on the basis of predecessors’research results, and explore this market scale effect respectively in a closed economy and open economy environment, finally with Chinese enterprise data for related empirical test and analysis.In theory, we generalize the M-O model by inserting product quality factor into linear utility function. Consumers get utility not only depend on consumption, but also affected by the quality of the products, the higher the quality of the products can bring higher utility of consumers, so higher quality has more competitive in the market. At the same time, we extends economic sector production department into intermediate products sector and final products sector. The products of intermediate sector will be used by the final sector and thus we can get a link between the two departments. In the intermediate sector, labor is set to be the only input, and this sector will use the homogeneous labor produces different quality level of intermediate products. The quality of products produced by the final sector effected by the quality of intermediate inputs. In a closed economy, opening wider will enhance the regional economic cooperation, reduce the flow barriers, promote the market integration, the bigger size of the market will attract more enterprises to enter, and with the increase of number of entrants in the market, the enterprise product price bonus ability, market competition becomes difficult. In order to win in the competition, occupy more market share, enterprises will improve the quality of the final product, which induce the enterprises tend to use the high quality inputs. In the open economic environment, opening policy will win larger foreign market space, enterprises facing market scale from a single domestic market scale to the size of the market both at home and abroad, as has been discussed in a closed economy to expand opening of domestic market scale effect, therefore, in the open economic environment we will focus on the export of opening wider to the outside market scale effect. As the same of closed economy, when the foreign market size become greater, much more enterprises will enter to the market, they will provide more varieties of products for consumer, and consumer will pursuit of high quality products. Compared with the single unit mass marginal cost in the domestic market, export markets unit mass of marginal cost will be lower. Facing with a tougher competition market, in order to survive in the market competition and profit, companies tend to use imported intermediate products which have higher quality than the domestic inputs. Thus they can improve the quality of the final product. At this point, we have explained the market scale effect by the theory model and drawn the following main conclusion:first, the companies use high quality intermediate inputs, can improve the quality of finished goods, and get benefits from the high quality of the final product could be used to offset the high quality of intermediate inputs into the negative effect caused by rising costs; Second, opening policy makes market scales up, on the one hand, enterprises can expand production more differentiated products quality, on the other hand, with the increase of number of entrants in the market, the enterprise price bonus ability, market competition difficult aggravating, the enterprise will tend to choose high quality intermediate inputs in production; Especially when the enterprise face greater export market scale, the more intense market competition will encourage enterprises to choose imported intermediate inputs for which have higher quality.In this paper, the empirical test is divided into two parts. In the first part, based on the Chinese customs database from2006to2009, we use ShiBingZhang (2013)’s method to measure the intermediate product quality imported by China’s manufacturing enterprises. We find that the quality of imported intermediate products have a overall rise among enterprises in China. The quality upgrades fast in processing trade enterprises (average annual growth rate of7.21%). But in the general trade enterprises, the quality of imported intermediate products is significantly lower than the processing trade enterprises used, and its quality optimization speed slow (average annual growth rate of1.65%). In the second part, to expand the opening of the market scale effect including the domestic market and export market scale effect, scale effect is limited by Chinese enterprises to domestic sales data availability, this paper empirically the export of opening wider to the outside market scale effect, namely the inspection on the size of the export market, the import of intermediate products to the enterprise quality choice tendency. This part mainly use2009database enterprise of China customs import and export trade data, supplemented by Chinese enterprises to export destination countries (or regions) of per capital GDP, the freedom overall index, and geographic distance data, as well as the2007input-output table of China. Firstly, we measure the quality of intermediate products imported by China’s manufacturing enterprises in2009; Secondly, we construct two variables for reflecting how much quality of imported intermediate inputs be used in the production of the final products. Thirdly, we construct the skew of quality mix across different products. Finally, we use SATA12to get the coefficients with a robust covariance matrix estimation. Based on the regression results, we found that:market size has a very robust significant impact on the skew of a firm’s quality of imported intermediate products. Chinese enterprises facing the market scale is larger, the more inclined to use high quality import of intermediate products in the production. As a result, China’s opening policy induce enterprises get bigger market size, the greater the size of the market faced by enterprise, the more incentive enterprises choose the high quality of imported intermediate products in the production, thus helping to improve the quality of products of China’s export. Obviously, it is helpful to realize the goal of industry quality upgrade.Finally, based on the theory and empirical research results, this paper puts forward the following suggestions:firstly, strength the international and domestic regional cooperation, further expanding and opening up, create greater market space for Chinese enterprises; Secondly, create a favorable environment for imported high quality intermediate products.