Domestic Transportation Infrastructure and Export Performance of Multiproduct Firms: The Role of Domestic Intermediate Inputs

In a multi-product Melitz model, we demonstrate that after a drop in domestic trade costs, the cost savings on the shipping of domestic intermediate inputs dominate the pressure from increased competition, thus aiding surviving domestic firms in increasing the number of export varieties. The response of export revenue at the product level is heterogeneous; revenue from a firm’s low-markup varieties will increase, while that from high-markup varieties will decrease. Total export revenue of a firm increases if its export varieties or its exports of low-markup products expand significantly. Using 2SLS regressions, we test this theory with data on Chinese manufacturing firms from 2000 to 2007 and find supportive evidence. As access to domestic intermediate inputs improves with the expansion of the railway network, the number of export varieties of domestic firms increases. Meanwhile, revenue per product drops. Because the positive effect on varieties dominates the negative effect on revenue per product, the total export revenue of firms increases on average. Furthermore, the entry of new firms also increases, lending additional support to our theoretical model.