Abstract:

In a firm heterogeneity and trade framework, this paper develops a “market access” approach to studying the distribution of firm productivity and production in a network of geographic locations. We distinguish between two competing effects of trade cost changes, namely import competition and export access, and derive consumer market access (CMA) and firm market access (FMA) measures respectively to capture each effect. This approach allows us to investigate the effect of trade cost changes in general equilibrium, taking into account inter-location spillovers. Empirically, this paper examines how China’s dramatic expansion of its highway system from 1998 to 2007 shaped the geographic distribution of domestic manufacturing firms. We show that this highway expansion reduced inter-regional trade costs and affected the selection of firms and resource allocation among firms. For the manufacturing sector on aggregate, the highway expansion contributed to 24% of the observed productivity growth, 40% of the decline in productivity dispersion, and 16% of the output growth, but these effects differ substantially across industries and locations, highlighting the distributional impact of trade cost changes.