# **1. Introduction**

The stellar export growth of China is often attributed to its low labor costs, trade liberalization, and policies that promote processing trade and foreign direct investment (FDI) (Branstetter and Lardy, 2006). The way that China has integrated itself with the rest of the world resembles a typical catch-up story in East Asia – by first participating in the downstream of global value chains (GVCs) and gradually moving upstream. Concurrently, when China was globalizing, many state-owned enterprises (SOEs), especially those that are small in downstream sectors, were privatized or let go.<sup>4</sup> Years of privatization provided room for the entry of the more productive private firms, which have been shown to be an important driver of the drastic productivity growth in China (Brandt, et al., 2012; Zhu, 2012). While the shares of SOEs in China’s total value added, employment, and gross exports have been declining substantially, recent evidence shows that SOEs still monopolize the key upstream and non-tradable sectors. SOEs also appeared to gain increasing prevalence and profits in the Chinese economy in recent years, especially after the global financial crises in 2008-2009.<sup>5</sup> Against this backdrop, this paper aims to answer the following questions: In which sectors did SOEs still have a prominent presence? How did the sectoral distribution of the prevalence of SOEs and its evolution in recent years shape the trade patterns of other firms, as well as their own? How did this sectoral distribution affect the intra-national trade and income distribution in China when the country was globalizing? To answer these questions, we first propose methods to split a conventional input-output (IO) table into sub-accounts that feature input-output linkages between different firm types. Specifically, we use firm-level data to group firms based on their key characteristics, which include export intensity, value-added to sales ratio, and ownership type. We then estimate the coefficients of the split tables using constrained optimization techniques, based on known statistics from firm census data for both manufacturing and service sectors, as well as detailed trade statistics. We can then estimate the volume of inter-industry trade flows between different types of firms within China and quantify the importance of different channels of indirect (value added) exports. While the paper focuses on SOEs, our methods are general enough to portray the domestic input-output linkages of Chinese exports, and can be applied to assess value-added exports by firm type in other countries. Our results add to the “value added trade” literature, which has focused mainly on the relative contribution of different countries to GVC, by formally portraying the composition and dynamics of the domestic segment of GVC in a large developing country.

> 4 The 15th Congress of the Chinese Communist Party in 1997 marked the watershed of China’s economic reforms. The Congress formally sanctioned ownership reforms of the state-owned firms and also legalized the development of private enterprises.

> 5 See Zhu (2012) for a comprehensive review of China’s growth experience and the decline role of SOEs. See He, et al. (2012) for a study showing the continuing importance of SOEs in shaping the Chinese economy. Wang et al. (2012) develop a theoretical model to rationalize the rising profits of surviving SOEs.

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