The network effect of Chinese competition on what domestic suppliers produce

When a sector suffers a reduction in the demand for its products, its suppliers are also affected. This paper shows that when demand for a product falls, there is a decline in the number of domestic plants producing inputs for that good. This result is obtained using data from Chilean manufacturing during the 1995–2006 period, using the increase in Chinese penetration as a demand shock. Using plant-product level data, I find that the observed effect on the number of suppliers is explained by multi-product plants dropping varieties, especially small plants, low-productivity plants and low-markup varieties. This is an intuitive but previously unobserved network effect through which import competition may have a productivity-enhancing effect.