Sep 21, 2013

Institutional Reforms: Expanding Export Variety

The graph is for China. "Encouragement Policy" refers to less restrictions for foreign ownership, which is positively related to the number of industries and diversification in production. The paper is by Liugang Sheng & Dennis Tao Yang.
The abstract
This paper presents theory and evidence showing that institutional reforms in developing countries can effectively expand their product varieties in export. Our model demonstrates that relaxing foreign ownership controls and improving contract enforcement can induce multinational companies to produce new products in host developing countries, and that a combination of the two reforms has an amplifying effect on the introduction of product varieties. Consistent with these theoretical predictions, we find empirically that ownership liberalization and judicial quality played an important role in raising the extensive margin of processing exports in China for the period of 1997-2007.

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