The Determinants of Intra\u85rm Trade in Export Processing: Theory and Evidence from China

This paper uses detailed product-level export data for China and an extension of the model by Antràs and Helpman (2004) that includes component search in processing trade to investigate the determinants of integration versus outsourcing. We exploit the coexistence of two regulatory trade regimes for export-processing in China, pure-assembly and import-and-assembly. We nd that if Chinese plants import materials and assemble them, the share of intra\u85rm exports is increasing in the intensity of headquarter inputs across sectors, and is decreasing in the contractibility of inputs. These results are consistent with existing theories. However, if Chinese plants engage in pure-assembly, under which regime ownership over the materials shipped to China remains with the foreign \u85rm, we \u85nd little support for existing theories on intra\u85rm trade that focus on the contract incompleteness and the relative importance of relationship-speci c investments. We also \u85nd that larger industry productivity dispersion is associated with a larger share of intra\u85rm exports under pure-assembly but not under import-and-assembly. These results are consistent with our models predictions