Exchange Rate Induced Export Quality Upgrading: A Firm-Level Perspective

Abstract

This paper studies the impact of exchange rate fluctuations on export product quality. Existing studies stress the link between home country depreciation and increased access to exports via a relative price effect. Our focus in this study is on the complementary effect of an import currency appreciation (i.e., the domestic currency appreciates relative to the sourcing country's currency). Our main finding is that firms upgrade their export quality in response to an import currency appreciation. We develop a partial equilibrium model to reveal the mechanism: an import currency appreciation that makes imported intermediates cheaper allows firms to switch to higher quality intermediates, thus permitting higher quality exports. Using Chinese Customs data, we find that an import currency appreciation increases both import, and export quality. Additionally, we find that export quality increases more for less productive firms, and for firms exporting to developed countries.

Keywords: import currency appreciation, quality upgrading, import quality, Export quality

JEL Classification: F10, F12, F13