Wholesale Industry Opening up to Foreign Investment, Supply Chain Integration and consumption Welfare: Theoretical and Empirical Analysis from a Micro Perspective
SUN Puyang, YANG Yiqing, JIANG Dianchun
School of Economics, Renmin University of China; Institute of International Economy, University of International Business and Economics; School of Economics, Nankai University
Summary:
To establish a new system for a higher-level open economy, China must also focus on optimizing the structure of the entire production supply and consumption demand chain, in addition to implementing more extensive and in-depth opening-up measures. Market opening will inevitably generate competitive effects, and how to effectively utilize open policies to promote the structural optimization of the supply and demand chain has become a crucial step in enhancing the effectiveness of opening up. To establish a new system for a higher-level open economy, greater emphasis should be placed on opening up the service sectors within the chain, particularly the access of foreign investment in service sectors such as transportation, wholesale, and retail. Among them, the opening up of the wholesale industry, as a necessary component of China's opening-up process, plays a pivotal role in connecting the production supply and consumption demand chain. The paper focuses on commodity wholesale, an important segment of the supply and demand chain, theoretically elucidating how the opening up of the wholesale industry to foreign investment ultimately exerts a significant impact on the consumer market by fostering competition within the chain. Based on actual data, the paper provides detailed empirical evidence for the theoretical analysis at the micro-level of cities and products. Although there is already a wealth of empirical research on service opening up, most studies have focused on its impact on the exports, productivity, and performance of downstream enterprises. Research on how service opening up affects supply and demand chain integration and the consumer market remains inadequate, and theoretical discussions on service opening up are also relatively scarce. This is mainly because, at the theoretical level, although service opening up promotes competition, its mechanism of action still needs to be revealed through a novel theoretical validation process. Therefore, based on trade behavior within the supply and demand chain, namely the impact of foreign investment opening in the wholesale industry on the pricing behavior of heterogeneous retailers, the paper deeply analyzes its impact on consumer welfare. The main innovations and contributions of the paper can be summarized as follows: Firstly, the paper theoretically elaborates on the role of foreign investment opening in the wholesale industry in enhancing the service functions of the supply and demand chain. Specifically, wholesalers do not directly produce goods, with the ability to transport various categories of goods, they only purchase goods from abroad and resell them to retailers. Importing goods incurs fixed costs, so wholesalers impose markup between producers and retailers, resulting in three ways for retailers to source goods. Retailers with the lowest marginal retail costs will choose to build their own import wholesale channels and expand import fixed costs due to the highest profits from directly selling imported goods; Retailers with higher marginal retail costs will choose to introduce domestic sources. Retailers with the highest marginal retail costs will indirectly import goods through wholesalers. Foreign investment opening in the wholesale industry will reduce the marginal costs of incumbent retailers, weaken the markup on indirectly imported goods, and increase the market share of direct import retailers, thereby lowering retail prices in the domestic market. Secondly, in terms of empirical analysis, the paper refers to methods from classic literature and attempts to measure the degree of foreign investment opening in China's wholesale industry between 2000 and 2019. Using the "Price Monitoring Data of Major Cities in China" collected by the Price Monitoring Center of the National Development and Reform Commission, the paper matches data by commodity names to obtain price data for 77 commodities in 131 cities to test the impact of foreign investment opening in the wholesale industry on retail prices in domestic market. The benchmark regression results show that for every unit increase in foreign investment opening in the wholesale industry, the retail prices of corresponding commodities will decrease by 5.39%-17.59%. Moreover, the paper treats China's accession to the World Trade Organization as an exogenous shock to mitigate potential endogeneity. Additionally, mechanism analysis reveals that the lower the total factor productivity of the retail industry, the larger the markup, and the larger the proportion of wholesale imports in total wholesale sales, the greater the marginal effect of foreign investment opening in the wholesale industry on commodity retail prices. Finally, based on the key parameters of the empirical analysis and using micro-level household information collected from the "Urban Household Survey", the paper finds that foreign investment opening in the wholesale industry ultimately enhances consumer welfare by affecting consumption prices, and this enhancement effect decreases as household income level increases. Combining the research conclusions, the paper proposes three policy implications: Firstly, China should further liberalize foreign market access in the wholesale industry, reasonably reduce the negative list, and pay particular attention to eliminate hidden barriers to ensure equal access for domestic and foreign wholesale enterprises to various markets beyond the scope of the negative list. Secondly, to attract more foreign-invested wholesale enterprises into the Chinese market, promotional efforts should be intensified in the international market to build the "Invest in China" brand, showcasing the market potential and investment opportunities in China's wholesale industry. Thirdly, the government should adopt a series of policy measures to reduce transaction costs and promote in-depth cooperation between wholesale and retail enterprises, thereby expanding effective demand and improving consumer welfare.
孙浦阳, 杨易擎, 蒋殿春. 批发业外资开放、供应链整合与消费福利——基于微观视角的理论与经验分析[J]. 金融研究, 2024, 532(10): 113-131.
SUN Puyang, YANG Yiqing, JIANG Dianchun. Wholesale Industry Opening up to Foreign Investment, Supply Chain Integration and consumption Welfare: Theoretical and Empirical Analysis from a Micro Perspective. Journal of Financial Research, 2024, 532(10): 113-131.
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