How do Related and Unrelated Varieties Impact Firm Economic Growth in China: An Empirical Analysis with Endogeneity

Using a sample of 84,868 Chinese manufacturing firms operating in the period 2006-2013, we analyze whether related and unrelated variety—measured by entropy method, affects firms’ economic performance. Our results show that, with Heckman (1979) two-step sample selection model correcting only for sample-selection bias, unrelated variety has a negative and statistically significant impact. If we also correct the endogeneity of the main explanatory variables—related and unrelated variety, by employing Bartik’s (1991) shift-share approach, we find that they become insignificant. We find a positive effect for related variety and negative effect for unrelated variety only if we consider highly-developed Chinese regions. Finally, we find that related variety has a positive effect only in the case of large firms.