What Drives Chinese Firms' Export Sophistication? A Perspective from the Rise of Minimum Wages

Abstract This paper re‐examines the driving factors behind the upgrading of China's export sophistication. Based on county‐level minimum wages and firm‐level export data for 2000–2013, this paper finds that the labor cost shocks caused by rising minimum wages have a significant positive impact on Chinese firms' export sophistication. Channel tests show that the positive effect of rising minimum wages on firms' export sophistication derives from the exit of less sophisticated products and the reallocation of the relative share of surviving products, rather than introducing new highly sophisticated products. Heterogeneity analysis reveals that rising minimum wages have a greater impact on export sophistication for low‐wage firms, domestic firms, and labor‐intensive firms. This paper has implications for developing countries regarding the transition from a low‐cost labor trade model to a sophistication‐driven trade model.