sector and for most industries within that sector, imported and domestic materials are gross substitutes, with the estimated elasticity of substitution ranging between 1.9 and 6.6. These large elasticities explain why lower prices of domestic materials can result in such signi...cant increases in the DVAR at the ...rm and thus the aggregate level in China.

Despite its simplicity, our methodology can be applied widely. In its basic form, our methodology can be used directly to measure the DVAR of processing exporters that operate in many export-oriented industries deeply embedded in global value chains.<sup>5</sup> Furthermore, with additional assumptions, our methodology can be applied to constructing the DVAR for countries that have little dependence on processing exports.<sup>6</sup> Our paper is related to several strands of literature. It relates to the literature on measuring value added trade.<sup>7</sup> In particular, our DVAR estimates complement the IO table-based estimates, by incorporating ...rm heterogeneity and thus minimizing aggregation bias. This paper is also related to the literature on the e¤ects of trade and FDI liberalization on domestic product varieties.<sup>8</sup> Our results con...rm existing ...ndings that the reduction in input tari¤s and increased presence of FDI in downstream sectors could lead to an expansion of domestic product variety. Finally, our paper contributes to the literature on international production sharing and global value chains,<sup>9</sup> as well as the studies on China’s increasing

> 5The industries of garment, shoes, and toys in Bangladesh, Cambodia, Dominican Republic, and Mauritius, as well as the electronics industry in Malaysia, Thailand, and Vietnam are some of the examples.

> 6In research in progress, we apply our current methodology to contruct the DVAR for a wide range of countries, where we obtain matched importer-exporter customs transaction data from the World Bank’s Exporter Dynamics Database (Cebeci, et al., 2012). Preliminary results, based on Bangladesh, Guatemala, Madagascar and Morocco, show an upward trend in the DVAR of these countries’aggregate exports.

> 7This literature starts with Hummels, Ishii and Yi (2001) to use industry input-output (IO) tables to calculate the value added to exports ratios for many countries. Recent related work includes Antràs, Chor, Fally, and Hillberry (2012), Johnson and Noguera (2012 and 2014), Koopman, Wang and Wei (2012, 2014), Antràs and Chor (2013), De la Cruz, Koopman, Wang and Wei (2013), and Johnson (2014).

> 8Goldberg et. at. (2008) studies the impact of trade liberalization of India on its export variety. Kee (2015) shows that the increased presence of FDI in the garment sector of Bangladesh caused a greater variety of domestic materials to become available which led to product scope expansion and productivity gains in domestic garment ...rms.

> 9See Feenstra (1998) for a review of the early literatre on foreign outsourcing. More recent work includes, among others, Baldwin (2012) which postulates how participating in a global supply chain should be viewed as a new strategy of industrialization; and Timmer et al. (2014) which summarizes the main ...ndings in the

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