Product Scope Adjustment to the China Shock: Competition at Home and Abroad

Abstract

How does the rise of China affect the product scope of exporters that compete with Chinese firms both at home and abroad? Korean administrative plant-level data reveal that export competition in third markets, in addition to import penetration in the domestic market, contracts the product scope. Dissecting product scope adjustment further, we uncover that export competition dampens the creation of new products, whereas import penetration precipitates the destruction of existing products. Moreover, import-induced product destruction reallocates resources toward core products.
We propose disproportionate importance of domestic market, a forward-looking aspect of product creation, and creative destruction as potential drivers.

Keywords: Creative Destruction, Export Competition, Import Penetration, Multi-Product Exporters, Product Churning, Product Scope

JEL Classification: D22, F14, F61, L10, L25