Product relatedness and firm productivity

This study examined influencing mechanism of product relatedness on the total factor productivity(TFP)11TFP, is the abbreviation for the Total Factor Productivity. of Chinese firms across geographical regions from the perspective of product space theory at the firm level. Based on matching data from the UN-COMTRADE, the China Customs, and -the Chinese Industrial Firms databases (2000–2015), the findings suggest the following. (1) Intracity and intraprovince product relatedness helped increase the total factor productivity of Chinese firms. Compared to firm-level intraprovince product relatedness, intracity product relatedness exhibited a greater impact on firm productivity. This result was still significant after replacing the explanatory and explained variables while considering endogeneity. (2) Heterogeneity tests indicate that intracity product relatedness positively affected firm productivity in various trade modes and fields in eastern China. At the provincial level, the productivity of general trading firms and firms in central and western China was more affected by intraprovince product relatedness. Product relatedness across geographical areas significantly affected industries with differing factor intensities. In cities, it significantly impacted capital-intensive industries with less impact on labor-intensive industries. (3) Intracity product relatedness at the firm level improved the total factor productivity of China's manufacturing firms primarily through technological innovation, knowledge spillover, and cost-reduction mechanisms.