The World Economy

The World Economy (2017)

doi: 10.1111/twec.12425

Fixed Export Costs and Trade Patterns:

The Case of China
Yu Gao1, Yin He2 and Xiaopeng Yin2
1
Institute of International Business, Shanghai University of International Business and Economics,
Shanghai, P. R. China and 2Department of International Trade, School of International Trade and
Economics, University of International Business and Economics, Beijing, P. R. China

1. INTRODUCTION AND LITERATURE

A S globalisation prevails and production processes are being segmented and distributed to
different parts of the world, trade patterns, and mainly the choice between the processing
trade and ordinary trade, have become an important issue in the international trade for devel-
oping countries. Processing exporters differ from ordinary exporters in that the business mode
of this type of exporters is to import all or part of the raw and auxiliary materials, parts and
components, accessories, and packaging materials from abroad in bond, and re-export as fin-
ished products after processing or assembly.
The processing export trade is popular in China. In 2007, about half of China’s total exports
(Figure 1) was consisted of processing exports. According to Baldwin and Lopez-Gonzalez
(2015), on the supply side China is a factory economy with its comparative advantage in final
assembly. However, processing exporters, who mostly engage in these final assembly activities,
are often criticised for their low value added. For example, Xing and Detert (2010) find that the
estimated wholesale cost of an iPhone shipped from China is $178.96, while the value added by
Chinese workers at Hon Hai Precision Industry Corporation accounts for just 3.6 per cent of the
total or $6.50.
Due to the importance and uniqueness of China’s trade patterns, scholars have begun to
examine how the two types of firms’ perform differently and the factors that affect a firm’s
choices between China’s two different trade patterns. When making this decision, a firm needs
to choose whether to export and which trade pattern to adopt.
The theory of heterogeneous firms, developed by Melitz (2003) and many other subsequent
researchers, tells us that firms only export when they pass a certain productivity threshold.
This means exporters are usually more productive and profitable than non-exporters (Bernard
et al., 2003; Eaton et al., 2004; Helpman et al., 2004, etc.). Castro et al. (2016) build up a
fixed cost index and explore how fixed export costs and productivity jointly determine the
export decisions of the firm. They also construct indices of fixed export costs for each indus-
try region year triplet and match them to domestic (non-exporting) firms. Further, they
demonstrate that increasing fixed export costs and productivity have opposite effects on the
propensity to export and that they could substitute for each other. However, this substitution
effect is weaker for high-productivity exporters. In addition, Castro et al. (2016) find that
high-productivity non-exporters face greater fixed export costs than low-productivity exporters
do. However, these studies have no implications for decisions on trade patterns.

We thank Keith Maskus, Edwin Lai, Albert Hu, Huiwen Lai, Mi Dai, Zhi Yu and participants of 2014
UIBE workshop on Technology Innovation and Intellectual Property Rights for their valuable comments.
All remaining errors are our responsibility.

1614 © 2016 John Wiley & Sons Ltd

 FIXED EXPORT COST AND TRADE PATTERNS 1615

FIGURE 1
Share of Processing Exports and Ordinary Exports in Total Exports in China (1999–2008) [Colour figure
can be viewed at wileyonlinelibrary.com]
60

55

50

% 45

40

35

30
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Ordinary export Processing export

Studies on trade patterns in China are relatively scarce. Lu et al. (2010) finds that foreign
affiliates engaging in exports are significantly less productive than foreign affiliates without
exporting behavior in China, while Lu (2011) extends such phenomenon to general situation
for all Chinese firms. On the other hand, Ahn et al. (2011) discuss the importance of trade
media in China’s exports. Recently, Yu (2015) empirically demonstrates that low-productivity
firms, large firms and foreign firms are more likely to engage in the processing trade. Manova
and Yu (2012) find that value added, profits and profitability rise from pure assembly to pro-
cessing, to ordinary trade. However, more profitable trade regimes require higher upfront
costs. As a result, credit constraints are needed here to induce firms to conduct more process-
ing trade and pure assembly.
This paper, based on the idea developed by Castro et al. (2016), uses the firm-level data
for China for the period 2000–06 to carry out a series of empirical analysis and shed more
light on the role of productivity and fixed trade costs in co-determining a firm’s choice
between the processing export and ordinary export in China. We argue that, given the charac-
teristics of the processing trade, processing exporters can obtain foreign orders much easier
than ordinary traders. The logic is that, compared with ordinary exporters, processing expor-
ters can more easily obtain orders either directly from foreign downstream firms/industries or
from intermediate trade agents who work for downstream firms/industries. Thus, the great sav-
ings in fixed trade costs give lower productivity or/and lower value-added firms a chance to
survive in the foreign market as processing exporters.
This paper is designed as follows. Section 2 describes the data. Section 3 presents the
empirical results. Section 4 concludes this paper.

2. DATA
Two main data sets are used in this research. The first data set is the Chinese industrial
enterprises database (firm data, hereafter) from the National Bureau of Statistics (NBS) for
the period 1998–2008. These data account for all state-owned enterprises (SOEs) and other
manufacturing firms in China with annual sales value, of more than RMB 5 million Yuan.

© 2016 John Wiley & Sons Ltd

1616 Y. GAO, Y. HE AND X. YIN

This database includes firms’ basic information (such as firms’ name, ownership, location,
property share and contact information), financial, employment and production information.
The second data set is taken from the China Customs Statistics database for the period
2000–06. This database shows all transaction-level import and export data and includes firms’
basic information, trade patterns, trade volume, trade value and prices.
To carry out the empirical analysis, it was necessary to merge the above two data sets.
The firm-ID coding systems for these two data sets are different, so the method of Ge et al.
(2011) was used to merge the firm data with the customs data for exporters only. To be more
specific, we first matched the two data sets by company name in each sample year. Then, the
postal code and telephone numbers were used to match the remaining firms. Some firms with
the same postal codes had different telephone numbers, depending on the data set. Conse-
quently, it was necessary to manually determine whether they were the same or two different
firms. Table 1 shows the matched results. Columns (1), (3) and (5) are the number of firms in
the firm, customs and matched data sets, respectively. Columns (2), (4), (6) and (7) show the
total export value recorded by the firm data, custom data and the matched data, respectively.
As shown in Table 1, the matched data set consists of 50–67 per cent of the firms listed in the
firm data set and 30–40 per cent of the firms listed in the customs data set, depending on the
year. Regarding the export value, the matched data set consists of 50–67 per cent of the total
export value reported in the firm data set or 40–60 per cent of that reported in the customs data.
That is, more than half of China’s SOEs and medium-to-large-size enterprises are engaged in
exporting. In the meanwhile, more than 60 per cent of the firms in China that exported between
2000 and 2006 were small non-SOEs and they had relatively small average export values.
The merged data set provides basic, financial and trade information of firms in China between
2000 and 2006. The total value of exports of each firm, in a specific year, is the sum of all its
export transactions for that year. Before we get to the econometric analysis, let us take a look at
some stylised facts of the difference between the two types of trade patterns in China (Table 2).
Table 2 shows some interesting facts and differences between the two trade patterns in
China. First, the total sales in both domestic and foreign markets of processing exporters were

TABLE 1
Basic Information of Matched Data Set of China NBS Industry Data Set and China Custom Trade Data
Set

Year NBS Firm Data Custom Data Matched Data

(1) (2) (3) (4) (5) (6) (7)

Number Export Number Export Number Export Export Value
of Firms Value of Firms Value(Billion of Firms Value in in Industry
(Billion RMB) Custom Data (Billion
RMB) Data(Billion RMB)
RMB)

2000 37,200 1,458 62,771 2,063 19,182 742.95 866.34

2001 40,804 1,625 68,487 2,405 20,828 903.71 960.53
2002 45,306 2,006 78,612 2,695 23,910 1081.37 1266.23
2003 50,906 2,694 95,688 3,629 28,176 1509.95 1666.20
2004 76,990 4,048 120,590 4,914 46,463 2644.55 2951.48
2005 75,624 4,774 144,030 6,234 47,770 3183.24 3354.59
2006 79,310 6,055 171,205 7,714 52,747 3793.80 4201.06

© 2016 John Wiley & Sons Ltd

 FIXED EXPORT COST AND TRADE PATTERNS 1617

TABLE 2
Statistics of Main Characteristics of the Two Trade Patterns

Variable Explanation Full Samples Processing Ordinary Exporters

Exporters

obs. Mean SD obs. Mean SD obs. Mean SD

log(Sales) Total sales 100,177 10.57 1.29 23,684 10.62 1.37 76,493 10.56*** 1.27
log(Domestic Domestic 100,177 7.08 4.57 23,684 4.21 4.75 76,493 7.97*** 4.13
Sales) sales
log(Export) Total export 100,177 9.49 1.70 23,684 10.22 1.59 76,493 9.27*** 1.66
log(TFP) Total factor 100,177 7.19 1.30 23,684 6.93 1.34 76,493 7.26*** 1.28
productivity
log(Labour Labour 100,177 3.84 1.09 23,684 3.51 1.18 76,493 3.95*** 1.04
Productivity) productivity
log(Sale Sales expense 100,177 6.75 1.74 23,684 6.35 1.78 76,493 6.88*** 1.71
Expense)
log(Firm Age) Age of firm 100,177 2.00 0.74 23,684 2.01 0.63 76,493 1.99*** 0.77
log(K/L) Capital-labour 100,177 3.77 1.34 23684 3.94 1.27 76,493 3.72*** 1.35
ratio
log(Labour) Labour used 100,177 5.29 1.14 23,684 5.62 1.12 76,493 5.19*** 1.13
log(Capital) Total capital 100,177 9.06 1.52 23,684 9.56 1.35 76,493 8.91*** 1.54

Notes:
(i) TFP is calculated according to Levinsohn and Petrin (2003).
(ii) We estimate the parameters of the production functions with each four-digit CIC code.
(iii) All monetary values are real values using the code of Brandt et al. (2012) to transfer the book value into the real
value. The bold values are bigger values when comparing the means of different characteristics of the two trade patterns.
(iv) T-test significance of the two trade patterns are shown in the ‘Mean’ column of ‘Ordinary Exporters’.
(v) ***p < 0.01

significantly larger than that of ordinary exporters over the period 2000–06. However, differ-
ent trade patterns obviously have different advantages, depending on the market: processing
exporters export significantly more than ordinary exporters, while ordinary exporters sell sig-
nificantly more in the domestic market. Second, processing exporters in China are signifi-
cantly more capital intensive compared with ordinary exporters. However, the latter have
significantly higher labour productivity and total factor productivity.
Again, these interesting facts lead to the question of what helps processing exporters to:
(i) have significantly lower productivity, but export more; and (ii) sell more in total but spend
less on sales expenses. As shown in the last row in Table 2, ordinary exporters have signifi-
cantly higher sales expenses than processing traders. However, understanding the key mecha-
nism behind these expenses would help. Although it is obvious that sales expenses cannot be
equal to fixed trade costs, we are going to tackle this problem in the next section and then
argue that the fixed trade costs for processing exporters might be the key factor in helping
them save money and sell more products, especially in foreign markets.
Exporters can be divided into three groups: (i) firms doing only ordinary trade; (ii) firms
doing only processing trade; and (iii) firms doing both processing and ordinary trade.1 As this

1
There are some exporting firms that cannot be matched in China Custom’s database. They are not
included in our empirical analysis in this paper.

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1618 Y. GAO, Y. HE AND X. YIN

paper focuses on differences in trade costs, productivity and profit between processing and
ordinary trade exporters, while firms in the third group could have a more complex and/or
mixed production mode with possible cost sharing/transferring between the two choices of
exporting patterns, only the first two groups are included in our empirical analysis.

3. EMPIRICAL RESULTS

a. Determinants of Trade Pattern Choices

First, we examine the determinants of a firm’s choice between the two trade patterns in
China. There are many factors affecting this choice, such as the productivity (Melitz, 2003), a
firm’s ownership (Yu, 2015) and location. We adopt a logit model to examine a firm’s trade
pattern decision between the processing export and ordinary export as follows:
PrðProcessingit ¼ 1Þ ¼ U½a0 þ a1 logðprodit Þ þ a2 logðsales expenseit Þ
X X X X
þb Zit þ c Dj þ g Dr þ d Dt þ eit ; (1)
i j r t

where Processingit is a dummy variable for firm i’s trade pattern in year t, which takes the
value of one if the firm is a processing exporter and zero if it is an ordinary exporter; Prodit
is the productivity of firm i in year t, which is measured by either its labour productivity (i.e.
value added per worker) or total factor productivity (TFP); Sale expenset is the total sales
expenses of firm i in year t. Sales expenses is a rough measure for the key variable, fixed
export costs, the focus of this paper. It is obvious that a firm’s total sales expenses include
expenses for both domestic and foreign sales, and variable and fixed sales costs. Thus, to
ensure that total sales expenses are the right measure for fixed export costs, the contamination
of domestic sales and variable costs needs to be dealt with later in this section. We also con-
trol the firm’s other characteristics, such as capital stock, amount of labour employed, and
firm age, and also industry-specific effects (Dj), provincial-level regional-specific effects (Dr)
and year-specific effects (Dt).
The marginal production cost for the two trade patterns might also be different and affect
the firm’s choice of trade pattern. To be more specific, processing traders are often just low
value-added assemblers. So firms with high marginal production costs might have a lower
tendency to be processing exporters. Unfortunately, we do not have a variable that captures
marginal production costs. To some degree, the variable for productivity, ‘value added per
worker’, used in the regression, can be treated as a rough proxy for this, as high value-added
industries and firms are often industries and firms that also have high marginal production
costs.
Again, our focus in this section was to first examine whether processing exporters have a
significantly lower productivity than ordinary exporters, after controlling for all other factors.
We then explore how a firm’s fixed trade costs affect its choice of the trade patterns, after
controlling for productivity. Table 3 presents the results.
Column (1) in Table 3 uses TFP to measure a firm’s productivity, while column (2) uses
labour productivity (value added per worker). Regardless of the measure used for a firm’s pro-
ductivity, the results show that, after controlling for the industry, location and year-specific
effects and other firm characteristics (capital stock, labour employed, firm age, and owner-
ship), an exporter with lower productivity and lower total sales expenses has a significantly

© 2016 John Wiley & Sons Ltd

 TABLE 3
Choice of Trade Patterns (Dependent Variable: Processing = 1 if the Firm is a Processing Exporter/0 if the Firm is an Ordinary Exporter)

Full Sample Pure Exporters First Year Exporters First-time Pure Exporters

© 2016 John Wiley & Sons Ltd

(1) (2) (3) (4) (5) (6) (7) (8)

log(TFP) 0.175*** 0.268*** 0.183*** 0.276***

(0.0136) (0.0301) (0.0423) (0.0813)
log(Labour 0.171*** 0.271*** 0.177*** 0.212**
Productivity) (0.0137) (0.0301) (0.0423) (0.0875)
log(Sales Expense) 0.287*** 0.288*** 0.211*** 0.210*** 0.236*** 0.237*** 0.130** 0.146**
(0.00946) (0.00947) (0.0208) (0.0208) (0.0291) (0.0291) (0.0605) (0.0606)
log(Capital) 0.323*** 0.339*** 0.674*** 0.698*** 0.203*** 0.220*** 0.658*** 0.688***
(0.0116) (0.0118) (0.0262) (0.0265) (0.0366) (0.0372) (0.0726) (0.0735)
log(Labour) 0.489*** 0.353*** 0.598*** 0.389*** 0.440*** 0.299*** 0.414*** 0.249**
(0.0162) (0.0167) (0.0345) (0.0358) (0.0525) (0.0535) (0.0873) (0.0988)
log(Firm Age) 0.156*** 0.155*** 0.551*** 0.550*** 0.108** 0.110** 0.00871 0.000843
(0.0194) (0.0194) (0.0399) (0.0399) (0.0478) (0.0478) (0.0869) (0.0866)
Constant 7.147*** 7.219*** 21.00 21.07 4.983*** 5.067*** 7.803*** 8.151***
(0.788) (0.788) (662.7) (661.0) (1.497) (1.497) (2.063) (2.047)
Ownership fixed Yes Yes Yes Yes Yes Yes Yes Yes
effect
Industry fixed effect Yes Yes Yes Yes Yes Yes No No
Province fixed effect Yes Yes Yes Yes Yes Yes Yes Yes
Year fixed effect Yes Yes Yes Yes Yes Yes Yes Yes
Observations 98,069 98,069 25,407 25,407 8,352 8,352 1,358 1,358
FIXED EXPORT COST AND TRADE PATTERNS

Notes:
(i) We control the industry fixed effect at the four-digit CIC code-levelled effect.
(ii) Robust standard errors in parentheses.
(iii) ***p < 0.01, **p < 0.05.
1619
1620 Y. GAO, Y. HE AND X. YIN

higher probability of being a processing exporter. In addition, an exporter with a larger size
of capital stock, a larger number of workers and a longer history is also more likely to be a
processing exporter.
These results are interesting in that processing exporters in China are larger in size in
terms of both capital and labour, but they also have a significantly lower productivity. The
typical observations made on heterogeneous firms in Melitz (2003) and other studies predict
that firms need to pass a certain threshold before beginning to export. The fact that lower
productivity firms have a significantly larger probability of choosing processing as their trade
pattern might imply that this trade pattern provides firms with some advantage in terms of
substituting for their low productivity. Here, we adopt the idea of Castro et al. (2016) that
fixed export costs might be a substitute for productivity. We argue that the processing trade
has its natural advantage in saving the lower productivity firm fixed export costs, so this type
of firm will usually choose the processing trade as their export pattern.
Columns (3) and (4) in Table 3 use a subsample of pure exporters to carry out the analy-
ses. Using this subsample means, the total number of firms becomes much smaller, decreasing
from 98,096 to only 25,407 firms. This is to say, about 75 per cent of China’s exporters also
sell in the domestic market and only 25 per cent serve the foreign market. The purpose of
composing this subsample is to eliminate the possibility of domestic sales contaminating the
data and to ensure that sales expenses only come from exporting behaviour. The results show
that, all the previous results remain unchanged, for pure exporters with no domestic sales and
it is true that lower sales expenses are a key determinant for firms in China becoming pro-
cessing exporters.
The heterogeneous firms in Melitz (2003) and many subsequent theoretical and empirical
studies also predict that exporting would reversely affect the productivity of a firm. To tackle
this issue, we use an even smaller subsample of first-time exporters2 to avoid the impact of
exporting on productivity. The results are shown in Table 3, columns (5) and (6). All of the
previous results remain unchanged.
Finally, in order to make sales expenses as close as possible to the firm’s fixed export
costs, we repeat the analysis, this time using first-time exporters who do not sell in the
domestic market, that is first-time pure exporters. This method would not only eliminate the
possibility of domestic sales data contaminating fixed export costs, but it would also alleviate
the impact of a productivity change caused by the trade pattern. As a result, although the total
sales expenses used in this regression would still not be a perfect measure for fixed export
costs, they would be a close enough proxy. The subsample now contains only 1,358 firms,
and the results are shown in Table 3, columns (7) and (8). All previous results remain
unchanged: firms with lower productivity and lower sales expenses have a higher probability
of choosing to be processing exporters.
Based on Yu (2015), some trade economists suspect that the difference in the tariff rates
of intermediate input imports could contribute the difference in production costs between
processing and ordinary trade, which might affect the choice between the two patterns. These
are not the same as the fixed export costs we focus on in this paper. However, because we do
observe that processing exporters import more intermediate goods and China has export-

2
‘First-time exporters’ refers to firms that export in year t and do not have any exports in previous
years. In the empirical analysis, we only use the data at year t (firms’ first exporting year) for these
firms. This makes the analysis in this part a cross-sectional one.

© 2016 John Wiley & Sons Ltd

 FIXED EXPORT COST AND TRADE PATTERNS 1621

tax-rebate policies, we still want to eliminate any possible impact from intermediate input tar-
iff rates on a firm’s choice between the two trade patterns. To identify this potential argument,
we include a dummy variable for whether the firm has intermediate inputs from overseas and
the tariff rate of the firm’s imported intermediate products into our empirical model. Due to
space limitations, we are unable to include these results in this paper,3 but our key results still
hold after controlling for this aspect.
Our argument confirms that lower productivity exporters have a significantly higher proba-
bility of becoming processing exporters. An important reason for this is that the processing
trade pattern gives firms a chance to save on fixed export costs. In this sense, in the determi-
nants of export patterns, productivity and fixed trade costs are substitutes for each other. This
is similar to the results of Castro et al. (2016).

b. Difference in Fixed Export Costs

The hypothesis in the previous sections stated that the fixed export costs between the pro-
cessing and ordinary exporters should be significantly different because processing exporters
can save a great deal, in exploring and penetrating foreign market, by taking orders directly
from related downstream industries or trade intermediaries that work for these industries.
However, ordinary traders usually need to open up a new foreign market for their products
and maintain this market by themselves. Unfortunately, our database does not provide a direct
measure that captures fixed export costs or export expenses. Only total sales expenses are
available. These include total sales expenses for domestic and foreign trade, and fixed and
variable expenses. Fortunately, rather than calculating the precise value or rank of fixed
export costs, as in Castro et al. (2016), the main focus of this paper was to see how fixed
export costs differ between the two trade patterns in China and how this difference affects a
firm’s trade pattern choice. The following steps were taken to separate fixed export costs from
the other above-mentioned factors.
First, we included in the regression total exports, so that the variable for sales expenses in
exporting is controlled for to some degree. For a similar purpose, we also controlled for
domestic sales in the regression to reduce the possibility of contamination by domestic sales
costs data.
The basic regression equation in the section is as follows:
logðSales expenseit Þ ¼ a0 þ a1 Processingit þ a2 log ðExportit Þ
X
þ a3 logðDomestic salesit Þ þ b Zit
i (2)
X X X
þc Dj þ g Dr þ d Dt þ eit :
j r t

The regression results are shown in Table 4. As was expected, column (1) in Table 4
shows that the higher value of total exports corresponds with significantly higher levels of
sales expenses. This controls for the variable costs of exporting. In addition, firms with more
domestic sales also have significantly higher levels of sales expenses. Thus, controlling for
domestic sales could alleviate its contamination on trade fixed costs. After controlling for
these factors, and other firm characteristics and industry fixed effects, province fixed effects

3
The results are available upon request.

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1622 Y. GAO, Y. HE AND X. YIN

TABLE 4
Difference of Fixed Export Costs (Dependent Variable: log(Sales Expense))

Variables (1) (2) (3) (4)

Full Pure First Year First-time Pure
Sample Exporters Exporters Exporters

Processing 0.360*** 0.220*** 0.240*** 0.245**

(0.0159) (0.0258) (0.0590) (0.0953)
log(Export) 0.417*** 0.817*** 0.272*** 0.825***
(0.00338) (0.00793) (0.00929) (0.0417)
log(Domestic Sales) 0.131*** 0.160***
(0.00124) (0.00511)
Log(K/L) 0.000167** 2.39e-05 0.000293*** 0.000101
(6.88e-05) (9.15e-05) (6.59e-05) (0.000243)
log(Firm Age) 0.171*** 0.0302** 0.223*** 0.0626*
(0.00656) (0.0125) (0.0183) (0.0372)
Constant 1.999*** 2.529*** 2.711*** 2.942***
(0.155) (0.479) (0.509) (0.586)
Ownership fixed effect Yes Yes Yes Yes
Industry fixed effect Yes Yes Yes No
Province fixed effect Yes Yes Yes Yes
Year fixed effect Yes Yes Yes Yes
Observations 100,177 26,064 10,085 1,393
R2 0.406 0.430 0.375 0.359

Notes:
(i) We control the industry fixed effect at the four-digit CIC code-levelled effect.
(ii) Robust standard errors in parentheses.
(iii) ***p < 0.01, **p < 0.05, *p < 0.1.

and year fixed effects, as in Castro et al. (2016), we found that China’s processing exporter
have significantly lower fixed export costs compared with ordinary exporters.
In addition, we excluded exporters with domestic sales and used the subsample of pure
exporters to conduct the regression again. As previously stated, this should completely elimi-
nate the contamination impact of domestic sales on fixed trade costs. Column (2) shows the
results, and the previous conclusion that processing exporters are associated with significantly
lower trade fixed trade costs remains unchanged.
Similar to the previous section, we used the subsample of first-time exporters to repeat the
analysis. The results are shown in Table 4, column (3), and our hypothesis is proven. That is,
after controlling for their other characteristics, processing exporters in China have a signifi-
cantly lower level of fixed export costs than ordinary exporters.
Finally, to more accurately capture the fixed export costs, we used the subsample of only
first-time pure exporters to repeat the analysis performed in Section 3a. The results are shown
in Table 4, column (4). Again, they support our key argument.

4. CONCLUDING REMARKS AND FURTHER RESEARCH

Castro et al. (2016) predict that when firms are deciding whether to export, there is a sub-
stitution effect between productivity and trade fixed costs. Our study shows that a similar
story exists in the choice between two different trade patterns in developing countries. This

© 2016 John Wiley & Sons Ltd

 FIXED EXPORT COST AND TRADE PATTERNS 1623

paper also provides an explanation of the existence and growth of low-productivity processing
firms in China. Our results are fully consistent with the results of the ‘new-new trade theory’
of Melitz (2003) and many other researchers. This investigation enriches the literature by
deepening our understanding of firms’ exporting behaviour.
In the future, we expect to continue our study. We would like to determine whether and
how firms change their decisions between the two trade patterns. Moreover, adding an inter-
mediate goods sector into the theoretical framework could increase our understanding of such
a change. Market heterogeneity could also be considered in a future study.

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