Institutional similarity, firm heterogeneity and export sophistication

Abstract What explains changes in export sophistication across firms and destinations? This paper studies the effects of institutional similarity and firm heterogeneity on export sophistication using revealed product mix and firm‐level data from China and establishes eight stylised facts. First, firms export more sophisticated products to destinations with more similar institutions. Second, the positive effect of institutional similarity is weaker for higher productivity firms. Third, whilst exports of private, foreign, and joint‐venture firms are more sophisticated, they are less sensitive to institutional similarity than public firms. Fourth, export‐oriented firms export more sophisticated products and are more sensitive to institutional similarity. Fifth, whilst remoteness to export markets does not affect export sophistication, firms that export to further destinations are less sensitive to institutional similarity. Sixth, although multiproduct firms and firms with lower export skewness export more sophisticated products, they are more sensitive to institutional similarity. Seventh, the effect of institutional similarity is asymmetric and is less important when exporting to countries with better institutions. Eight, firms that are more dependent on contract enforcement export more sophisticated products, and more so to markets with similar institutions.