A Study On The Impact Of Destination Countries'Demand Shocks On Firms' Markups

Under the background of counter-globalization,China has always adhered to a comprehensive open to the world and strongly advocated trade liberalization.Since the accession to the World Trade Organization,China's exports have continued to increase,and its export status is far ahead in the world.However,with the continuous increase in the total export volume,China's terms of trade continue to deteriorate,and the economy is highly vulnerable to external shocks.For a long time,China lacks high-tech skills and development,and its products are at the bottom of the value chain.Therefore,when China uses a large amount of goods to exchange a unit of product from a developed country,it is impossible to obtain greater trade gains.In the context of increasingly fierce competition in the export market,especially fierce demand shock,China's economy will face severe challenges.Then,in the face of the demand shock of the destination country,how to behave for these Chinese export enterprises becomes the primary research issue of this paper.Based on the existing research on demand shocks,product mix and markups,we can gain the following two conclusions: firstly,in the face of strong demand shocks,multi-product exporters will constantly adjust and reorganize their internal products;secondly,when multi-product exporters increase exports of the best performing products,the change of their markups is also larger.Therefore,this paper hopes to study the relationship between demand shocks and the markups through the mechanism of product reallocation,as well as study the influence of firm heterogeneity.Specifically,the research questions of this paper include: how will the product reallocation caused by demand shocks affect the change of markups of multi-product firms? Further,will the impact vary according to the heterogeneity of multi-product firms? What is the significance of these results to government decisions and firms' export decisions? These problems are worthy of our in-depth discussion.Based on the firm level data from 2000 to 2006,this paper is focused on the impact of demand shocks on the dual margins,products reallocation and markups.According to the theoretical model,demand shocks will generate endogenous growth in the local competitive market,which will make the firms increase the exports of those products with a larger market share,thus the exporters will adjust their markups to a larger extent.According to the empirical results of this paper,the author can drawthe following conclusions:(1)the demand shocks have a significant positive correlation with intensive margin.It shows that the demand shocks can promote the firms to increase the production and export of the existing products.At the same time,the positive correlation between the demand shocks and extensive margin indicates that the demand shocks also have a positive effect on promoting firms to increase the varieties of export products.(2)demand shocks also have a significant positive effect on the export bias,which is shown by the fact that demand shocks can promote multi-product firms to increase the exports of better performing products;(3)the interaction between demand shocks and export intensity has a significant positive effect on the change of markups and the results of robust tests show that the impact is robust.Finally,the influences of firm heterogeneity are also studied.The results show that different ages,different regions and different technologies of firms have significant effects,but the influence of different regions vary largely;conversely,the impacts of different ages and technology levels vary little.