Demand Shocks, Export Diversification, and Firm Performance During the Great Trade Collapse

This paper analyzes the impact of external demand shocks from the 2008 to 2009 Great Trade Collapse on the performance of Chinese exporters and examines how export diversification mitigates these effects. Using Chinese Customs data merged with financial data from all listed Chinese firms, we construct firm‐specific demand shocks based on pre‐shock export destinations. These firm‐specific demand shocks serve as instrumental variables to assess the effects of export activity on firm productivity and profitability. Our findings show that firms exporting to countries with steeper GDP declines experienced slower export growth, resulting in reduced productivity and profitability. However, export diversification mitigates these adverse impacts, underscoring its role in stabilizing firm performance amid global economic shocks.