Market size, competition, and firm productivity for manufacturing in China

This paper investigates the selection effects of market size on firm productivity by using firm-level data on Chinese manufacturing industries for the period 1998-2007. China's provinces are an appropriate proxy for market size due to local (provincial) protectionism, which generates fragmented domestic markets. The estimated results using a quanta approach show significant selection effects for 15 out of 29 sectors. We find that provinces above the median employment density weed out approximately two to eight percent more firms than those below the median density. Further, market size tends to generate greater selection effects in the sectors with stronger local protections, scale economies or product differentiation. We also find that firm selection effects are robust with respect to alternative productivity estimates, grouping criteria, and spatial units, but can be different across types of firms and may suffer from underestimation due to the noise in productivity estimates and the exclusion of small firms.