How did China’s WTO entry affect its companies?

The Chinese government significantly restructured and modernised the economy to meet the WTO standards in December 2001. The openings mandated under China’s WTO accession agreement made its economy the most open of any large developing country, and China has achieved reasonable progress toward meeting its obligations (Branstetter and Lardy 2008). China’s accession to the WTO enabled it to receive the most-favourable-nation treatment, which improved the access of Chinese exporters to foreign markets. In the WTO accession process, the Chinese government was also requested to reduce restrictive measures in the market, including reforming state-owned enterprises (SOEs). China’s entry into the WTO was deemed to have a significant impact on Chinese exporters in the 2000s.

There have been many studies on the effects of China’s entry into the WTO on its productivity growth. Brandt et al. (2012) showed that the Chinese economy recorded higher productivity growth after WTO accession and that this growth was driven mostly by firms’ entry and exit that are increasingly allowed by China’s decentralised reforms. Yu and Jin (2014) observed the positive impact of imported intermediate inputs on firm productivity. Nevertheless, we find few studies that examine the different effects that WTO membership on exporters among foreign-invested enterprises, private domestic firms, and SOEs.

Exporters of different ownership type 

The statistics which we calculated from the firm-level data of Chinese electric machinery and equipment, telecommunications equipment, computers, and other electronics equipment manufacturers show that the modes of firms’ internationalisation vary across different ownership groups (see Wakasugi and Zhang 2015 for details). After WTO accession (2002-2007), in comparison with the preceding period (1998-2001), a large number of private and foreign-owned firms entered the domestic market, but the number of SOEs dramatically decreased from 2,024 firms to 476. Consequently, while the share in terms of the number of firms rose from 54% to 63% for private domestic firms and from 30% to 33% for foreign-owned ones, the share of SOEs rapidly fell from 16% to only 4%. Assuming a standard theory whereby firms enter the domestic market and export along with a rise of productivity, it is anticipated that the fraction of exporters for SOEs will rise when the number of SOEs decreases. However, Figure 1 shows that, after WTO accession, the fraction of exporters for SOEs has remained at 20%, while that of exporters among private domestic firms and foreign ones has increased from 19% to 22% and 68% to 72%, respectively. Standard conjecture of the relation between productivity and exports cannot be simply supported by Chinese firms after the WTO accession.

Figure 1. Fraction of exporters by ownership

Productivity growth after the WTO accession  

In order to investigate the relation between productivity and exports, we first measured the total factor productivity of firms from 1998-2007, following Levinsohn and Petrin’s (2003) approach. Figure 2 shows the productivity growth of firms by ownership in the period 1998-2007. After WTO accession, the annual productivity growth for SOEs increased by 0.70, while that of private domestic and foreign firms increased only by 0.30 and 0.36, respectively, in comparison with the annual productivity growth before the WTO accession. Brandt et al. (2012) and Elliott and Zhou (2013) revealed a high rise in SOEs’ productivity after WTO membership.¹ However, previous studies did not note that the fraction of exporters for SOEs with a high productivity growth did not rise, in comparison with the increasing fraction of other exporters even with a low productivity growth after the WTO accession. This raises a question as to what was the reason for the asymmetric effects of the WTO entry on firm’s decision to export among different ownerships.

Figure 2. Total factor productivity growth by ownership

Note: The three types of firm ownership are Private domestic firms (PDFs), State-owned enterprises (SOEs), and Foreign-invested enterprises (FIE). 

Asymmetric effect of WTO accession on private and state-owned enterprises 

Theoretical and empirical studies reveal that firms with higher productivity tend to export (Bernard 1999, Melitz 2003, and Helpman et al. 2004). However, from Chinese statistical data, we find that the standard mode of internationalisation is not simply applicable to Chinese firms’ exports after WTO accession. We statistically examined the different effects of the WTO accession on firms’ export decision. We use a logit model to estimate the probability to export. After controlling for the debt-asset ratio, government subsidy, and time-varying and region-specific factors, we estimate how the effects of productivity and ownership on firms’ export decision changed after the WTO accession. Our results suggest that Chinese firms with higher productivity are more likely to export regardless of ownership, and that this relationship increased after WTO accession. Moreover, we find that the effect of WTO accession on exports is asymmetric among different types of ownership—negative for SOEs while positive for private domestic firms.

Concluding remarks 

The growing productivity of Chinese electric machinery and electronics manufacturers after China’s WTO accession largely increased their exports. The stylised fact that firms with higher productivity tend to export can be also applied to Chinese firms’ exports. But when focusing on the ownership difference, the results of statistical estimation show that the effects of China’s WTO accession on firms’ exports are not uniform among different ownerships. The effect of WTO accession was negative for SOEs. Policy changes in China aimed to liberalise the domestic market, improve access to foreign market, and reform SOEs after the WTO accession. The asymmetric effect of China’s WTO membership on export decision between private domestic firms and SOEs can be interpreted as the result of policy changes in order to remove favourable treatments only given to SOEs for their export promotion and unfavourable conditions given to private firms for their exports before the WTO accession.

References 

Bernard, A B and J B Jensen (1999), “Exceptional exporter performance: cause, effect, or both?” Journal of International Economics, 47(1), 1–25.

Brandt L, J Van Biesebroeck and Y Zhang (2012), “Creative accounting or creative destruction? Firm-level productivity growth in Chinese manufacturing,” Journal of Development Economics, 97, 339–351.

Branstetter, L and N Lardy (2008.), “China’s embrace of globalization,” in Brandt, L. and Rawski, T. G. eds. China’s Great Economic Transformation, 633–682. New York: Cambridge University Press.

Elliott, R and Y Zhou (2013), “State-owned enterprises, exporting and productivity in China: a stochastic dominance approach”, The World Economy, 36(8), 1000–1028.

Helpman E, M J Melitz and S R Yeaple (2004), “Export versus FDI with heterogeneous firms”, The American Economic Review, 94(1), 300–316.

Levinsohn, J A and A Petrin (2003), “Estimating production functions using inputs to control for unobservable”, Review of Economic Studies, 70(2), 317–340.

Melitz, M J (2003), “The impact of trade on intra-industry reallocations and aggregate industry productivity”, Econometrica, 71(6), 1695–1725.

Yu, M and L Jin (2014), “Imported intermediate inputs, firm productivity and product complexity”, Japanese Economic Review, 65 (2), 178–192.

Wakasugi, R and H Zhang (2015), “Impacts of the World Trade Organization on Chinese Exports”, RIETI Discussion Paper 15-E-021.

Footnote

1 This result is consistent with previous studies. Brandt et al. (2012) argue that the rapid growth in productivity among SOEs is a result of the dynamic force of creative destruction in the period 1998-2007. Elliott and Zhou (2013) reveal that exporting SOEs were most productive in the period 2002-2004.

This article is published in collaboration with VoxEU. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Ryuhei Wakasugi has been Professor of International Economics at Kyoto University and Adjunct Professor of Keio University since 2007 and Research Counselor of RIETI since 2006.

Image: A Chinese national flag flutters at the headquarters of a commercial bank. REUTERS.