Competition in the Chinese market: Foreign firms and markups

Abstract

This study addresses the issues of whether foreign firms outperform domestic firms in markups and whether the presence of foreign firms dampens the markup of their local counterparts in the Chinese market. Analysis of a firm-level panel dataset, we find foreign-invested enterprises (FIEs), particularly those not from Hong Kong–Macau–Taiwan, charging a higher markup. Estimations on the determinants of markups highlight the important roles played by technological capability and intangible assets. The potential channels and mechanisms are also discussed. Entering the Chinese market through joint ventures helps FIEs raise markups, and this effect is notable for HMT–FIEs, which might have a relative advantage of cultural proximity than other FIEs. Sharing equality with national capital to construct political connection (guanxi) also helps facilitate markups. Crucially, foreign presence is positively related to local firms’ markups, suggesting that the spillover and linkage effects dominate the competition pressure brought about by foreign direct investment.