Internetization and the markups of export firms: Evidence from China

Can internetization help Chinese exporting firms escape the "low markup trap"? We contend that it does, as internetization improves firms' capabilities and efficiencies in gathering and communicating information. We incorporate information costs and firm innovation choice into a heterogeneous firm model to test this hypothesis. The causality between firm-level internetization and markups is identified with a new instrumental variable designed to capture exogenous shocks to firm-level Internet exposure. After analyzing various internetization strategies, including social media, emails, and homepages, our results indicate that internetization directly in-creases the markups of Chinese exporting firms. In addition, with the enhanced information availability, inter-netization stimulates their innovation activities. Thus, we identify innovation as one channel, among others, through which internetization indirectly boosts the markups of China's export firms.