Zhong Tenglong | Input Trade Liberalization and the Rise of Star Enterprises: Theoretical and Empiri

After joining the World Trade Organization, China experienced significant changes in market concentration, with markups, profits, sales, and market share all concentrating in highly productive firms, although the underlying mechanisms remain unclear. Furthermore, the concentration of market share in more productive firms aligns with Melitz's trade theory, suggesting that intra-industry allocation is beneficial for overall productivity. However, market concentration also has negative consequences, such as inhibiting competition and leading firms monopolizing the market. This will further lead to a decline in the labor share and a reduction in social welfare. Against this backdrop, this paper examines, from both theoretical and empirical perspectives, how tariff reductions and input trade liberalization lead to market share concentration in star firms and their economic consequences.

Associate Professor Zhong Tenglong presented his statement.Four facts：1. China's import trade liberalization is mainly reflected in the growth of imports of intermediate and capital goods. From 1998 to 2007, China's import tariffs were on a downward trend. The study categorizes imported products into three types: intermediate goods, capital goods, and consumer goods. Analysis reveals that intermediate and capital goods accounted for the highest proportion of imports over the decade, with intermediate inputs accounting for as much as 76% of imports; 2. Market share is concentrated in leading companies during trade liberalization. The study focuses on leading companies, dividing market share into four types. In 2008, the top 1% of companies increased their market share to 20%, the top 5% to 40%, the top 10% to over 50%, and the top 20% to 70%; 3.The rise in TFP is highly correlated with market concentration. The study focused on TFP during this period and found that the average TFP curves, whether weighted by the initial year's market share, the current year's market share, or without considering weights, all showed an upward trend.4. Increased market concentration may lead to a decrease in the labor share. The research focuses on the labor share. It found that firms with larger market shares have relatively lower labor shares.

Based on the above findings, the article proposesTwo research questionsFirst, what is the causal relationship between input trade liberalization and market concentration? Second, how does this causal relationship affect resource allocation efficiency?Professor Zhong introduced the theoretical model of the research. The article hypothesizes functions from both the consumer's and producer's perspectives, and further derives the cost function, pointing out that variable costs differ for importing and non-importing firms. Based on this, the article derives the marginal cost function. After maximizing the profits of domestic firms, the article then derives the cut-off condition. Next, the article focuses on the self-selection conditions in the service outsourcing market. Professor Zhong points out that firms need to consider the profit difference between importing and not importing when deciding whether to import intermediate goods.

The model yieldsThree key conclusionsas follows:First, more efficient companies have easier access to the intermediate goods import market. Second, with the liberalization of input trade, highly productive companies will gain more market share and profits. Third, with the liberalization of intermediate input trade, market share will become more concentrated among leading companies.

In the empirical section, the article further...Three-directional analysisFirst, this study investigates the impact of trade liberalization on market concentration. Second, it examines the self-selection effect of imports. Third, it introduces the interaction term method to analyze how differences in initial productivity and initial markup rates cause trade liberalization to have differentiated effects on firm profit indicators or sales revenue.The article finds that leading companies tend to import intermediate goods. Furthermore, it examines the impact of trade liberalization on intermediate inputs on trade structure, revealing that leading companies gain higher market share and profits, while less efficient companies face a greater risk of exiting the market.

Lu Bing