Contagious Exporting and Foreign Ownership: Evidence from Firms in Shanghai using a Bayesian Spatial Bivariate Probit Model1

Whether a firm is able to attract foreign capital and whether it may participate at the export market depends on whether the fixed costs associated with doing so are at least covered by the incremental operating profits. This paper provides evidence that success for some firms in attracting foreign investors and in exporting appears to reduce the associated fixed costs with exporting or foreign ownership in other firms. Using data on 8,968 firms located in Shanghai, we find that contagion and spillovers in exporting and in foreign ownership decisions within an area of 10 miles in the city of Shanghai amplify fixed-cost reductions for both exporting as well as foreign ownership of neighboring firms. Contagion among exporters amplifies a one-percent reduction in fixed exporting costs by about 3.9 percent, while contagion among foreign firms amplifies a one-percent reduction in fixed foreign ownership costs by about 5.4 percent. These findings are established through the estimation of a spatial bivariate probit model. The authors gratefully acknowledge helpful comments by Baomin Dong and Herbert Egger. Moreover, they are indebted to the participants at the 1st Henan Symposium on Development and Institutional Economics and the Annual World Conference of the Spatial Econometrics Association at Zurich 2014.