Overseas Chinese Networks and Processing Trade in China

ABSTRACT Processing trade plays a key role in China's trade liberalization since the economic reform in the 1970s. Using a newly collected dataset of county‐country paired overseas Chinese network matched with firm‐country paired trade data, this study empirically shows that overseas Chinese networks significantly increase the processing exports of firms in China. We find that overseas Chinese networks primarily promote processing export by foreign firms and stimulate outsourcing of production from high‐income and middle‐income countries in Europe and Asia to China. We also find that overseas Chinese networks reduce information frictions to promote processing trade. Finally, we find that overseas Chinese networks are effective in generating large initial trade volumes but play a limited role in expanding the size of existing trade relationship over time.