Greater access to export markets and the potential technological spillovers through increased participation in international trade can be instrumental in improving economic growth in developing countries. The broad goal of this project is to better understand the determinants of firms’ export success and the implications of firm heterogeneity for aggregate trade and welfare. A better understanding of these issues will facilitate the optimal design of growth-promoting policies in the world’s poorest countries. An important question in current trade research is whether export success results from the capacity to produce goods efficiently at a low marginal production cost, or from the ability to produce high-quality goods. The latter likely entails higher production costs as it requires higher-quality inputs. This project will help distinguish between these alternatives by examining the variation in product quality across exporting firms, products and export markets, as well as the role of quality differentiation in the context of trade liberalization. The results will offer guidance as to whether governments should encourage investment in efficiency-improving technologies or investment in technologies that advance firms’ product quality.

The project will comprise two research papers that make use of unique proprietary data on the universe of Chinese firms engaged in international trade. It builds on a completed working paper which establishes that
(1) More successful exporters offer higher-quality products at higher prices, and
(2) Firms export higher-quality versions of their products to countries where consumers are richer and market competition is tougher.

A first follow-up paper will incorporate heterogeneity in quality across firms and products in the analysis of multi-product firms. The goal of this project will be to establish new stylized facts and to develop a theoretical framework that rationalizes them. Preliminary results suggest that firms’ top-selling products are their highest-quality goods, and that firms focus on their core competencies in markets where they export fewer goods. A second follow-up paper will analyze the response of Chinese exporters to the removal of export quotas on textiles and apparel under the Multi-Fiber Agreement.

The main contribution of this study will be in documenting how firms adjust product scope and product quality in response to trade reform, and the relative importance of re-allocations across and within firms for aggregate trade outcomes. Both of these papers will examine the input sourcing strategies of successful exporters. Firms in developing countries may find it difficult to obtain high-quality intermediate inputs domestically in order to produce high-quality products, and may thus have to import such inputs from more advanced economies. Corroborating this mechanism would imply that developing countries should consider import liberalization as a means of stimulating their exports.

The project will also indirectly shed light on the distributional consequences of trade liberalization. For example, evidence that export performance is positively associated with product quality and that higher-quality goods require the use of higher-quality inputs and more skilled workers would imply that trade reforms may bring aggregate welfare gains at the expense of increased inequality. Finally, the project will compare the trade activities of private domestic firms, state-owned companies, joint ventures and affiliates of foreign multinationals in China. Anecdotal evidence suggests that MNCs employ better technologies, use higher-quality inputs and produce higher-quality products. In addition to studying these patterns in the data, this research may also inform how firms interact and learn from each other. “As told by International Growth Centre”

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