Productivity, Quality and Export Behavior
43 Pages Posted: 31 May 2012
Date Written: February 1, 2012
Abstract
In a representative sample of Italian manufacturing firms, we find a robust negative correlation between productivity (however measured) and sales to low-income destinations as a share of total exports. This fact seems at odds with the heterogeneous-firms literature, which predicts high-productivity firms to sell relatively more in harder-to-reach destinations. We argue that this and other empirical regularities can arise from the interplay between endogenous, cross-firm heterogeneity in product quality and cross-country heterogeneity in quality consumption. To test this conjecture, we marry Verhoogen (2008) with Eaton, Kortum and Kramarz (2011), by introducing quality into a heterogeneous-firms framework featuring firm- and market-specific shocks in entry costs and demand, and structurally estimate the models parameters by the simulated method of moments. Our estimates imply the preference for quality to be monotonically increasing in per capita income of the foreign destinations. The model also predicts a negative correlation between firms' involvement in innovation activities and their export share to low-income destinations, a finding supported by our data. Overall, our results strongly suggest that firms producing higher-quality products tend to concentrate their sales in high income markets.
Keywords: heterogeneous firms, productivity, quality, export shares, structural estimation
JEL Classification: F1
Suggested Citation: Suggested Citation
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