Decisions of firms in open economies

This thesis discusses decisions of firms in open economies. It consists of two parts: Chapter 1 is on understanding firms exporting decisions. Chapter 2 is about firms location choice in an open economy.;Chapter 1 uses Chinese firm-level data to document facts that run counter to the accumulated evidence about exporting firms and provides a model that reconciles these contrasting patterns. The new facts are: (1) China's exporters are typically less productive and sell less in the domestic market than non-exporters, and (2) the distribution of export intensity exhibits a U-shape, with more than half of China's exporters exporting most of their output. The new facts call into question the generality of recent trade theory, which has been extremely successful in explaining the behavior of exporters in developed countries. However, I show that the economic forces described by Melitz (2003), when properly interpreted, are exactly the ones needed to explain the observed patterns among Chinese firms. When countries differ in their factor endowment, sectors that are intensive in the locally abundant factor face higher competition in the domestic market than in foreign markets. Hence domestic rather than export markets select the most efficient firms. In the Chinese data, both the productivity differences between exporters and non-exporters as well as the distribution of export intensity are systematically related to the labor intensity of the firm or its industry. This relationship is exactly what is predicted by a Melitz model augmented to allow for factor intensity to vary by industry. Lastly, I show that the model correctly predicts the effects of trade liberalization in China following China's integration into the WTO in 2001.;Chapter 2 is on understanding firms location choice in an open economy. Manufacturing industries are highly concentrated geographically. One possible explanation is agglomeration externalities: producers benefit from the existence of nearby producers. This Chapter provides a theoretical foundation for agglomeration externalities and measures their impact on the dynamic pattern of industry concentration in China empirically.