Introduction of new varieties of goods in the Chinese manufacturing sector

This paper studies the introduction of new varieties of goods in the Chinese manufacturing sector during the period 1998-2000. I first develop a monopolistic competition model with multiproduct firms in which firms are heterogeneous in two dimensions: the fixed cost of introducing varieties into the market and the variable cost of production. Using firm-level data for the Chinese manufacturing sector, I compare the performance of foreign and domestic firms in innovation, measured by the number of new varieties that they introduce, and, as described in the model, I estimate whether the number of new varieties can be explained by differences in the cost of innovation and variable productivity. Once observable firm characteristics are accounted for, I find that firms with more than 50 percent of foreign ownership introduce on average twice as many more new goods as private domestic firms; fully foreign-owned firms (100 percent of foreign ownership) introduce three times more new varieties than private domestic firms. Foreign firms in selected industries have advantages in productivity and in the cost of introducing new varieties. Advantages in productivity account for approximately 40 percent of the difference in the number of varieties, while advantages in the cost of innovation account for 13 to 25 percent of the same difference. †I would like to thank G. Grossman, B. Honoré, E. Tamer and participants of the May 2004 Industrial Development Conference for helpful comments, and P. Keefer for access to the data. This paper has also benefited from early discussion with J. Altonji, S. Berry, P. Goldberg, R. Pande and G. Porto. email: [email protected]