Solow (1956) model concludes that the growth rate of output in the long-run depends upon the rate at which technological change occurs. Exports and foreign direct investment (FDI) is one channel though which technology and hence economic performance could be enhanced. A number of studies document a direct relationship between trade and economic growth using cross-country data (1). For the study in China, using provincial data set from 1952 to 2005, Lau (2010) examines the determinants of conditional convergence in China. The results indicate that low inflation, transport and telecommunication infrastructure, and trade openness could stimulate economic growth in China. Recently, a number of papers have empirically examined the relationship between exporting and economic performance using firm-level panel data. Even studies find stylized fact that exporting firms achieve higher productivity than non-exporters (2), and exporting activities granger cause productivity (3).
However, there is a lack of literature on examining the relationship between a firm's productivity and imports though which technological progress occurred for Chinese firms, except Fan and Hu (2008), they use the World Bank data covering the time period, 1998-2000 and reach the conclusion that importing machinery could improve firm performance. Nevertheless, our study complements the existing literature by using the latest data set, and more importantly, by examining the effects of exports and importing machinery on a firm's performance in a dynamic panel econometrics setup. In the following sections, we examine and compare the effects of exports, imports of capital and machinery, and in-house R & D on a firm's productivity.
The remainder of this paper is organized as follows. Section 2 reviews the results of previous studies and discusses potential causal effects of exports and imports on firm performance. Section 3 describes the data we have used in this study. Section 4 provides research methodology and constructs key variables. Empirical results and its implications will be discussed in section 5. Section 6 concludes the paper and suggests some directions for further research.
2. Impact of globalization on firm productivity
2.1. Exporting activities
There exist several studies which focus on the causal relationship between exports and productivity. Kunst and Marin (1989) explore this relationship based on Austrian data using time series analysis and find no evidence of causal link from exports to productivity. Marin (1992) analyzes causality between export and labor productivity for the United States, United Kingdom, Germany, and Japan. This study also suggests that there is no causality between these two variables. Some further studies claim that these studies have some methodological problems and find evidence of causal link from exports to productivity.
Exporting activity may affect firm productivity for the following reasons: First, Grossman and Helpman (1991) and Evenson and Westphal (1995) suggest that overseas buyers may provide technical assistance to domestic exporting firms, hence improving firm productivity. Second, Clerides et al. (1998) argue in their model that active involvement of exporting firms in the international market could improve firm productivity because of easier access to world frontier technology at a lower cost. Third, a higher international standard on product quality could motivate exporting firms upgrading their production technology (Verhoogen 2008). Fourth, participation in the export market could reduce information cost on new product innovation and market demand (Fafchamps et al. 2002; Maurin et al. 2002).
2.2. Importing activities
The casual relationship between imports of capital and productivity has not been examined extensively in current literature, in particular at the firm specific level (4). Previous studies have shown a positive relationship between import of capital and economic growth at the national level as a channel for technological diffusion. …