Foreign direct investment, processing trade, and the sophistication of China’s exports

Abstract. China’s export structure has shown a rapid shift towards more sophisticated industries. While some believe that this trend is a result of processing trade and foreign direct investment, the evidence is mixed. This paper examines variations in level of export sophistication across China’s manufacturing industries. We find that an industry’s level of export sophistication is positively related to the share of wholly foreign owned enterprises from OECD countries and the share of processing exports of foreign-invested enterprises, and negatively related to the share of processing exports of indigenous Chinese enterprises. Evidence from the relative export prices of Chinese goods, which measure within-product export sophistication, shows a similar pattern