Understanding the product structure of exporters: The role of intellectual property protection in export origins

Abstract

Adjusting the structure of export products is crucial for exporters to respond to export market competition and cost changes. The existing literature has identified firm-level factors, such as productivity, and industry-level factors, such as trade liberalisation, as important determinants of an exporter’s export product structure. However, the institutional quality has received less attention. Using data from Chinese manufacturing exporters from 2000 to 2007, we examine the impact of province-industry level intellectual property protection (IPP) in export origins on product-adding and product-dropping rates of manufacturing exporters from the perspective of institutional quality. We employed an instrumental variable approach to solve the endogeneity problem of the IPP variable. The findings demonstrate that strengthening IPP at origins raises exporters’ product-adding and product-dropping rates, conditional on their production. Exporters can achieve this promotional effect on product-adding and product-dropping rates by transforming towards more downstream production and integrating more vertically along their value chains. Additionally, strengthening IPP can increase the product-adding rate of exporters by encouraging more innovative activities and foreign direct investment absorption and can raise the product-dropping rate by reducing the varieties of imported intermediate goods. In the heterogeneity analysis, we find this product structure effect is insignificant for digital trade exporters. Our findings provide important policy implications for IPP reforms towards export upgrading.