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"Domestic Superstars vs Superstar FDI : Granular Comparative Advantage and Micro Implications"

Abstract :

This paper argues that large, granular firms funded by FDI are systematically different from their domestically-funded counterparts ; and that these two sources of granularity differ both in their relationship with industry exports, and in the nature of competitive pressure they place on the much more numerous non-granular firm. Employing Chinese firm-level panel data over the period 1998-2007, I find that granularity’s net effect on industry exports is negative ; the opposite of what Gaubert and Itskhoki (2021) find for France. However, the effect of granularity originating from FDI in China is strongly positive as long as the specification is not biased towards domestic-market seeking firms, and the overall picture seems to be converging towards that of a developed country over time. Evidence is also provided on the channels through which heterogeneous associations with granular comparative advantage, as described by variation in industry exports, take form. Finally, an attempt at exploring the micro implications of granularity from these two groups is made by building an empirical model that examines the determinants of firm-level markups. Moving this line of research into FDI and taking on a developing country’s perspective is important as they can be disproportionately influenced by large firms, and FDI plays a large role in their economies