Chinese Competition and Network Effects on the Extensive Margin: Evidence from Chilean Manufacturing

The impact of Chinese competition on manufacturing firms in other countries has received much attention, but there is little evidence of its indirect effects through input-output linkages. Using detailed firm-product data on... [ view full abstract ]

The impact of Chinese competition on manufacturing firms in other countries has received much attention, but there is little evidence of its indirect effects through input-output linkages. Using detailed firm-product data on inputs and outputs of Chilean manufacturing firms, I construct a sector-level network of input-output linkages at a highly disaggregated level and study plant entry and exit. Using the instrumentation strategy developed by Autor et al. (2013), based on exploiting the exogenous component of Chinese import penetration, I find that part of the network propagation of the shock occurs through the extensive margin. That is, when a sector suffers a negative demand shock, their direct and indirect suppliers might be forced to leave the market. However, most of the effect on the extensive margin is because of multi-product firms dropping certain varieties, rather than firms leaving the market. Consistent with the existing literature, I also find that import competition has a negative effect on employment along the value chain.

Finally, I explore whether entries and exits in themselves induce further changes in the extensive margin, with the potential for creating `cascading failures' that could amplify the impact of idiosyncratic shocks. I find no evidence of these `cascading effects'.