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Journal ArticleDOI

Multi-product firms, tariff liberalization, and product churning in Vietnamese manufacturing

23 Jan 2019-Social Science Research Network (Economic Research Institute for ASEAN and East Asia)-Iss: 918

Abstract: Utilizing firm-level data during 2010–2015, we examine the frequency and characteristics of multi-product firms in Vietnamese manufacturing. Our major findings are as follows. First, multi-product firms are larger, more capital-intensive, more productive, and are more likely to export. Second, multi-product firms are active in the market. Approximately 60% of firms adjust their product scope within a 6-year period. Third, the contribution of firms’ product extensive margin to aggregate output growth is limited due to the prevalence of product dropping, which offsets the positive impact of product adding. Much of output growth during the period is thus generated by the intensive margin. Turning to the link between tariff reduction and product shedding, we do not detect any significant impact. However, we find that exporters play an important role in product adding, which suggests that they may contribute to aggregate growth through the channeling of product scope expansion. Contrary to our expectations, our analysis offers limited support for the heterogeneity of product turnover across ownership types. While we find that state-owned enterprises are more likely to spread economic activities across products and industries, there is little difference in terms of product churning among foreign direct investment, state-owned enterprises, and the domestic private sector.

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ADBI Working Paper Series
MULTI-PRODUCT FIRMS, TARIFF
LIBERALIZATION, AND PRODUCT
CHURNING IN VIETNAMESE
MANUFACTURING
Ha Thi Thanh Doan
No. 918
January 2019
Asian Development Bank Institute

The Working Paper series is a continuation of the formerly named Discussion Paper series;
the numbering of the papers continued without interruption or change. ADBI’s working papers
reflect initial ideas on a topic and are posted online for discussion. Some working papers may
develop into other forms of publication.
Suggested citation:
Doan, H. T. T. 2019. Multi-Product Firms, Tariff Liberalization, and Product Churning
in Vietnamese Manufacturing. ADBI Working Paper 918. Tokyo: Asian Development Bank
Institute. Available: https://www.adb.org/publications/multi-product-firms-tariff-liberalization-
product-churning-vietnam
Please contact the authors for information about this paper.
Email: doan.ha@eria.org
Ha Thi Thanh Doan is an economist at the Economic Research Institute for ASEAN and
East Asia.
The views expressed in this paper are the views of the author and do not necessarily reflect
the views or policies of ADBI, ADB, its Board of Directors, or the governments they
represent. ADBI does not guarantee the accuracy of the data included in this paper and
accepts no responsibility for any consequences of their use. Terminology used may not
necessarily be consistent with ADB official terms.
Working papers are subject to formal revision and correction before they are finalized and
considered published.
The author would like to thank participants at the ADBIWTO conference on “Making Trade
Inclusive: How to Manage Trade Adjustment” for their helpful comments.
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© 2019 Asian Development Bank Institute

ADBI Working Paper 918 H. T. T. Doan
Abstract
Utilizing firm-level data covering the 20102015 period, this study documents the frequency
and characteristics of multi-product firms in Vietnamese manufacturing. Our major findings are
as follows. First, multi-product firms are larger, more capital-intensive, more productive, and
are more likely to export. Second, multi-product firms are active in the market. Approximately
60% of firms adjust their product scope within a 6-year period. Third, the contribution of firms’
product extensive margin to aggregate output growth is limited due to the prevalence of
product dropping, which offsets the positive impact of product adding. Most output growth
during the period is thus generated by the intensive margin. Turning to the link between tariff
reduction and product shedding, we do not detect any significant impact. However, we find
that exporters play an important role in product adding, which suggests that they may
contribute to aggregate growth through the channeling of product scope expansion. Contrary
to our expectations, our analysis offers limited support for the heterogeneity of product
turnover across ownership types. While we find that state-owned enterprises are more likely
to spread economic activities across products and industries, there is little difference in terms
of product churning amongst foreign direct investment, state-owned enterprises, and the
domestic private sector.
Keywords: multi-product firms, trade liberalization
JEL Classification: F15, L23

ADBI Working Paper 918 H. T. T. Doan
Contents
1. INTRODUCTION ......................................................................................................... 1
2. LITERATURE REVIEW ............................................................................................... 3
3. DATA SOURCE .......................................................................................................... 4
3.1 Variables ......................................................................................................... 4
4. A PROFILE OF MULTI-PRODUCT FIRMS ................................................................. 5
5. FIRM’S ADJUSTMENT OF PRODUCT SCOPE AND AGGREGATE
OUTPUT GROWTH .................................................................................................... 8
6. TRADE LIBERALIZATION AND PRODUCT TURNOVER ........................................ 11
7. CONCLUSION .......................................................................................................... 14
REFERENCES ..................................................................................................................... 16

ADBI Working Paper 918 H. T. T. Doan
1
1. INTRODUCTION
Multi-product firms are the dominant players in international production and trade
(Bernard et al., 2010; Goldberg et al., 2010a). Moreover, these firms are active in
alternating their combination of product varieties. In fact, Bernard et al. (2010) have
documented a frequent change in the product mix in the United States (US), where
almost 50% of multi-product firms change their product mix every five years. Indeed,
firms’ adjustment in product scope constitutes one important layer of firm heterogeneity
(Nocke and Yeaple, 2006).
Understanding firms’ product adjustment is crucial for several reasons. First, changes in
the commodity mix of manufacturing firms affect firms’ output and productivity, through
which they exert an impact on the economy’s aggregate growth. For example, Bernard
et al. (2006) have demonstrated that the contribution to output growth of
a product margin outweighs that of firm entry and exit. Goldberg et al. (2010a) have
observed a similar phenomenon in Indian manufacturing, where changes in firms’
product mix contributed to as much as 25% of output expansion. In this regard, the
changing of product lines is a nontrivial channel of resource reallocation within firms.
Second, switching production activities has important implications for the structural shift
across sectors. For instance, a shift away from resource-based and primary products
to more capital-intensive products, a source of industrial upgrading, will induce the
economy to move to the next stage of the industrialization process.
Why some firms diversify their production is not a new question in the industrial
organization literature. For instance, Penrose (1955) has suggested that product
diversification provides firms with greater opportunities for market expansion, which can
be limited if they only manufacture a single product. Recent studies on international trade
and firm heterogeneity, however, have proposed a different approach. Most of the
theoretical models on firms’ responses to trade at the product level predict that product
dropping is popular amongst all multi-product firms (Eckel and Neary, 2010; Mayer et al.,
2014). Competition pressure instigates firms to narrow down their product range by
dropping peripheral products and reallocating resources to their core competencies,
defined as the product with the largest cost advantage compared to other products of the
firm. Just as the least productive single product firms are swept out of the market due to
competition, the least productive product for each multi-product firm should also be
dropped.
However, several studies suggest a more heterogeneous picture, where an adjustment
in product scope is contingent on the firm’s position in the productivity distribution,
firm size, or ownership type (Qiu and Zhou, 2013; Lopresti, 2016). Lopresti (2016),
for example, examined changes in the product structure of US firms following the
CanadaUS Free Trade Agreement of 1989. Utilizing Bayesian econometric techniques,
the author found that heterogeneity exists in firms’ response conditioning regarding their
engagement in global markets. In particular, more domestically oriented firms narrow
down their product range, while more internationalized firms either add more products or
do not respond to tariff reduction. Nevertheless, the adjustment is mixed when sales are
used as an additional dimension of firm heterogeneity. Given these inconsistent
theoretical findings, a conclusion remains an empirical matter.
This research adds to the growing literature on firmproduct dynamics by investigating
product turnover in Vietnamese manufacturing, a developing country with impressive
economic growth and a high level of trade openness. We utilize the Vietnam Enterprise
Survey covering the 20102015 period. Our research objectives are threefold. We first
present several stylized facts about multi-product firms, including their presence in

References
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