Export prices, selection into exporting and market size: Evidence from China and India $ Sushanta Mallick a, *, Helena Marques b a Queen Mary University of London, UK b University of the Balearic Islands, Spain A R T I C L E I N F O Article history: Received 7 November 2016 Received in revised form 8 February 2017 Accepted 22 March 2017 Available online xxx JEL Classifications: F14 F41 O11 Keywords: Exchange-rate pass-through Pricing-to-market Selection into exporting Product differentiation India China A B S T R A C T This paper empirically analyses the export pricing behaviour of Chinese and Indian exporters when there is selection into exporting. Previous exchange rate pass-through estimates that did not take selection into account could be biased if selection into exporting is correlated with pricing strategy. We use 6-digit product-level data across high- and low-income export destinations over the period 1994–2007 and assess a number of determinants of the degree of pass-through of exchange rates to export prices, such as the level of external demand, exporter’s wage cost, degree of competition in export markets, currency volatility and the direction of currency movements. We find systematic differences in the pricing strategies of Chinese and Indian exporters while uncovering a selection bias in exports to high-income markets, although the pricing of exports to low-income markets is independent of the decision to export. Export prices do not increase systematically with the destination market per capita income, and tend to be less sensitive in shipments to advanced nations. Export prices of India are sensitive to the volatility of the trade-weighted nominal effective exchange rate (NEER), indicating heterogeneity in prices to maintain competitiveness, but not in China as volatility is insignificant given a fixed currency system. It is also revealed that a country with a relatively flexible currency regime and arms-length trade such as India is more likely to exhibit incomplete pass-through, whereas a country with an inflexible currency system and involved in outward processing trade is more likely to have full pass-through as shown in the case of China. © 2017 Elsevier Ltd. All rights reserved. 1. Introduction It has been shown that the observed pass-through of exchange rate changes to international prices is incomplete due to sluggish price adjustment originating in mark-up adjustment by the exporters following changes in costs or movements in their currency (see for example Nakamura & Zerom, 2010; and the references cited there in). The extent to which exchange rate fluctuations affect international prices (ERPT) can be influenced by the firm’s pricing orientation as well as by the degree of exchange rate uncertainty. A substantial literature has documented that exchange rate changes are, at best, weakly associated with changes in traded goods prices at the consumer level (Auer & Chaney, 2009; Devereux & Yetman, 2003; see Mallick and Marques (2008a, 2012) for the case of India). The explanations given in the literature for the low pass- through that is commonly found are primarily microeconomic, such as the practice of PTM by imperfectly competitive firms $ The authors acknowledge financial support from the British Academy through a Small Research Grant (Project SG-46699). Thanks are due to Yong Yang for his research assistance in compiling the datasets from UN Comtrade. We also thank an anonymous reviewer of this journal and the participants at the Money, Macro and Finance (MMF) 45th Annual conference, 11–13 September 2013, Queen Mary University of London, UK; RES2013 Annual Conference at Royal Holloway, University of London, April 3–5, 2013; Annual Meeting of the Allied Social Science Associations (ASSA) (AIEFS session discussant, Parul Jain), 3–6 January, 2013, San Diego, USA; the BMRC-QASS Conference on Macro and Financial Economics, 24 May 2012, Brunel University, UK; 11th European Economics and Finance Society Annual Conference, Istanbul, Turkey, 14th–17th June 2012 and at the XIII Conference on International Economics, Granada, Spain, 21st–22nd June 2012, for their useful comments that contributed to the improvement of the paper. The usual caveat applies. * Corresponding author. E-mail addresses: s.k.mallick@qmul.ac.uk (S. Mallick), helena.ferreira-marques@uib.es (H. Marques). http://dx.doi.org/10.1016/j.ibusrev.2017.03.009 0969-5931/© 2017 Elsevier Ltd. All rights reserved. International Business Review xxx (2016) xxx–xxx G Model IBR 1392 No. of Pages 17 Please cite this article in press as: S. Mallick, H. Marques, Export prices, selection into exporting and market size: Evidence from China and India, International Business Review (2017), http://dx.doi.org/10.1016/j.ibusrev.2017.03.009 Contents lists available at ScienceDirect International Business Review journal homepa ge: www.elsev ier.com/locate/ibusrev