The Impact Of Foreign Demand Change On Firms’ Export Diversification

With China’s accession to World Trade Organization(WTO)in 2001,export has been an incentive to Chinese economic growth for a long time.However,the Financial Crisis in 2008 converts the increased trend of Chinese export,and the dramatic decrease in foreign demand is an important reason for it.At present,trade protectionism and deglobalization have been on the rise,which put a significant fluctuation in the foreign demand and export.As an important aspect of export structure,export diversification not only alleviates adverse shocks but also enhances firms’ innovation capability and competitiveness.Currently,the government of China encourages opening the domestic market and expanding the export market,such as the“One Belt One Road” Initiative,which promotes the foreign demand of Chinese firms a lot.Moreover,with the rapid development of technology and government support for firm innovation,the product scope and market scope have great expansion potential.As a result,with the increased uncertainty of the global market,the problems about how to tackle the changes in foreign demand to promote export and improve the distribution of foreign trade are important.This article starts from the perspective of the foreign demand change and systematically studies the effect and mechanism of the foreign demand change on the export diversification of enterprises.Firstly,based on existing studies and a theory model,the theoretical mechanism of foreign demand affecting the export diversification of enterprises is explained.From the perspective of enterprises’ coping strategies,the increase of imported intermediate products and the substitution of domestic sales are identified as two mechanisms.Secondly,by measuring the export scope of products and markets of the Chinese enterprises,the evolutionary characteristics of export diversification are investigated from all angles.Thirdly,comprehensively use the matching data of the Chinese industrial enterprise database,customs trade database,and CEPII-BACI database to thoroughly examine the causal relationship between foreign demand and export diversification.Then analyze the robustness and heterogeneity of the results.Finally,the influence of market characteristics on the relationship between foreign demand change and diversification of export products is discussed.The study finds a robust and positive impact that foreign demand put on firms’ export diversification,and the impact varies with companies’ export experience,trade methods,and financial cost.Further mechanism tests confirm that the effect of diverse intermediate input imports and the shift from domestic sale to export are two effective channels through which foreign demand affects the export diversification of enterprises.Firms import more kinds of intermediate inputs and replace some domestic sales with exports that respond to the increasing foreign demand,promoting the export scope of products and markets.When considering the characteristic of export markets,the result shows that although the increased foreign demand encourages firms to expand the market scope,developed areas and near regions are still their first choices.The policy implications are as follows: first,governments should take measures that adapt to market development to help enterprises export;second,governments should promote domestic consumption to alleviate the impact of weak external demand on enterprise exports;third,governments should pay attention to new entrants and help them enhance export competitiveness;fourth,governments and firms should to further reduce the operating cost of enterprises and improve the efficiency of enterprises.