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Can trade liberalization shape sector dynamics by inducing reallocation of resources towards more efficient use? This paper explores whether and how import competition affects productivity dispersion within 425 four-digit manufacturing industries in China. Using a number of comprehensive micro-level datasets over the period of 2000–-2006, we find that import penetration reduces the productivity dispersion in general and the main channel is through the competition-induced dynamic resource allocation within industries by driving the least efficient firms out of the market. The trade-induced productivity truncation is more evident for imports under the ordinary trade regime and for final imported goods and intermediate goods imported by the same industries. The results are robust to various model specifications and estimation methods.

Import competition, dynamic resource allocation and productivity dispersion: micro-level evidence from China