Foreign competition and export diversification: Evidence from domestic firms in China

Abstract This study investigates the effects of foreign firms on the product diversification of domestic exporters in China. The result shows that domestic exporters react to the competition of foreign firms by reducing their product diversification. Firms drop the marginal products and concentrate on core products, and they distribute their exports more evenly among the product varieties they retained. Mechanism tests suggest that the competition of foreign firms reduces the sales, efficiency and R&D expenditure of domestic firms. And the effects are more pronounced for SOEs and firms with larger scales. This study explains the decline in the export diversification of domestic firms in China and contributes to the understanding of the variety adjustment of firms in the face of competitive pressure.