Higher-Education Expansion, Human-Capital Supply, and the Rising Domestic Content in China’s Exports

Abstract

In sharp contrast to the general downward trend around the globe, in China the domestic content in exports has been steadily increasing. The determinants that drive this outstanding result are hotly debated. However, there still lacks a clear causal inference on the determinants of the rising domestic content in China’s exports. This study uses the expansion of higher education that has taken place in China since 1999 as a "quasi-natural experiment" to directly examine its causal effects on the increasing domestic content in Chinese exports. We use the difference-in-difference specification and find that the availability of high-quality human capital has enabled the domestic production of high-quality industrial inputs that substitute for imported intermediates. According to our estimation, the human-capital supply shock can explain roughly one-half of the increase in the domestic content in China's processing exports. This means that domestic reform can be an important driving force for China to capture more domestic value added in its exports, which also serves as an important policy lesson that other developing economies can learn. Through this new perspective, we offer a first look at how behind-the-border policies affect the competitiveness of industries in a globalized world.