Journal of Management World, 2020, Issue 8

Authors: Lv Yue and Deng Lijing

Abstract: Product diversity is not only the classic hypothesisof consummer preterence since thedevelopment of New Trade Theory, but also an important performance of social welfareimprovement and economic growth. The principal contradiction in China's society has beentransformed into the contradiction between people's ever-growing needs for a better life andunbalanced and inadequate development. To meet consumers'increasing demand for diversityneeds to be supported by diversity of production. At the same time, with the advantage of laborforce, China has rap-idly integrated into the global value chain dominated by developed countriessince the Reform and Opening Up, especially since China's accession to the WTO in 2001.Although the demand of product diversity can be met quickly by importing foreign productswhich can't solve the lack of fundamental technology and uneven quality of "Made in China'Since 2018, the intensifying Sino-US trade fiiction forces us to reflect whether"Smiling Curve"the existing GVC division mode, will lead developing countries into"Low- end Locking"including the"Product Locking" that may be faced in the process of product upgrading as one ofthe four modes of GVC upgrading. Therefore, this paper will explore the impact of GVCembeddedness on firms’product diversity of Chinese manufacturing fims, so as to providebeneficial empirical evidences from the breakthrough of"Product Locking"problem for developingcountries which may be captured in the low end of global value chain.

Based on the merged finm-level data of"Annual Surveys of Industrial Firms from the NationaBureau of Statistics (NBS) of China","China Customs Trade Statistics"and"Product Output Dataset "from 2000 to 2009, this paper empirically analyzes the impact and internal mechanisms ofGC embeddedness on product scope of Chinese manufacturing firms. We find that, first of allembedding in GVC significantly narows the product scope. Secondly, the crowding out effectcaused by market competition and the lack of absorptive capacity are the internal mechanisms ofthis inhibition effect. Thirdly, from the perspective of firms’dynamics, this inhibition effect ofGVC on product scope mainly appears in new entry fims, persistent firms and persistent productsFrom the perspective of region and owner-ship, the inhibition effect is particularly prominent forfirms which in the eastern region and FDI firms. Finally, the paper finther analyzes the resourceallocation effect within finm firom the point of product switching, and finds thatthe curent productswitching fiequency of Chinese fims still needs to be improved, and product switchingoccursmore in the samples of large-scale, high productivity and export firms.

To sum up, this paper tries to make the following marginal contributions: Firstly, in terms ofresearch data, thispaper uses the entire product scope of fims instead of export product scopewhich helps to explore the effect of em-bedding in GVC on Chinese firms’ product scope and itsinternal mechanism in a more comprehensive and detailed way. Secondly, this paper futher explores the mechanisms of this inhibition effect, which is caused by market competition and thelack of absorptive capacity. At the same time, this paper analyzes the heterogeneous effects, anddis-cusses the resource reallocation effect by introducing product switching. Last but not least, wechoose feasible IV to control the potential endogeneity, and we use detailed empirical analysis toensure the reliability of the research conclusions.

Keywords: global value chain; product diversity; product locking; manufacturing firms; product switching