Product Market Risk, Financial Development and Firm Creation Along the Supply Chain

Abstract

We study the effects of product market risk on entrepreneurial activities in China, using a favorable change in U.S. trade policy as a plausibly exogenous shock. We do not find an increase in entry rates for domestic firms in exposed industry. However, for upstream suppliers, entry rates increase significantly in undeveloped cities, but decrease in developed cities. We also find that domestic entrepreneurs in undeveloped areas are more likely to enter the upstream industry by exporting following the shock. Our results suggest that the product market shock only increases domestic firm formation in China at one remove along the supply chain.