China Industrial Economics, 2018, Issue 5

Authors: LYU Yue, SHENG Bin, LYU Yunlong

Abstract: This paper presents a theoretical model of market fragmentation's effect on Chinese firms' DVAR and uses China' customs transaction-level trade data and annual surveys of industrial firms data from 2000 to 2013 to analyze the effect of market fragmentation on firms' DVAR. We find that maket frragmentation has a negative effect on firms' DVAR. Although the policy of market fragmentation is a dominant strategy for local govermment, it limits firms' benefits of scale economy and damages the ability of China's firms to create more value added. According to the study of mechanism, market fragmentation affects firms' DVAR by promoting intermediate trade, depressing innovation and increasing the ratio of processing trade. Besides from the perspective of different ownership, the negative effect of market fragmentation on private firms is more significantly than that on state-owned and FDI firms. Based on different trading patterns, market fragmentation has a stronger negative impact on DVAR of ordinary trade than that on processing trade. From the perspective of regional division, compared to the central and western regions, market fragmentation has a more significant negative effect on eastern region's frms. From the angle of industry's factor intensity, market fragmentation has a larger negative effect on capital intensive and skill-intensive firms than on labor-intensive firms. Meanwhile, wealso find liberalization of intermediate trade and upstream monopoly can strengthen the negative effect of market fragmentation on fims' DVAR. The practices of breaking the regional segmentation, effectively weakening market barriers, and abolition of impeding the unified market and fair competition are the important ways to improve Chinese firms' DAVR and promote China's manufacturing to the high-end of global value chain.

Key Words: market fragmentation; DVAR; global value chains; promotion tournament; supplyside structural reform