Working Paper

Abstract

Whether a firm is able to attract foreign capital and whether it may participate at the export market depends on whether the fixed costs associated with doing so are at least covered by the incremental operating profits. This paper provides evidence that success for some firms in attracting foreign investors and in exporting appears to reduce the associated fixed costs with exporting or foreign ownership in other firms. Using data on 8,959 firms located in Shanghai, the authors find that contagion and spillovers in exporting and in foreign ownership decisions within an area of 10 miles in the city of Shanghai amplify fixed-cost reductions for both exporting as well as foreign ownership of neighboring firms. Contagion among exporters and among foreign-owned firms, respectively, amplify shocks to the profitability of these activities to a large extent. These findings are established through the estimation of a spatial bivariate probit model.