Does Tougher Import Competition Foster Product Quality Upgrading?

44 Pages Posted: 20 Apr 2016

See all articles by Ana M. Fernandes

Ana M. Fernandes

World Bank - International Trade Division; World Bank

Caroline Paunov

OECD

Date Written: April 1, 2009

Abstract

Over the past two decades, globalization, and more specifically the increased exposure to competition from low-price producers in China and India, has created a new economic environment for other emerging economies. The most advantageous way for manufacturing firms in those economies to position themselves in domestic and international markets is to offer upgraded and differentiated rather than mundane labor-intensive products. This paper investigates whether increased competitive pressure from imports forces firms to improve the quality of their products. The econometric analysis relies on a rich dataset of Chilean manufacturing plants and their products. Product quality is measured with unit values (average prices) and industry-level transport costs are used as an exogenous measure of import competition. The authors find a positive and robust effect of import competition on product quality. This effect is found to be particularly strong for non-exporting plants. The results also show that increased import competition from less advanced economies is the major cause for the positive impact on quality upgrading. The overall evidence points to the benefits of trade openness for product innovation but demonstrates at the same time that competitive pressure alone will not enable local plants to catch up with leading world producers.

Keywords: Transport Economics Policy & Planning, Markets and Market Access, Economic Theory & Research, Water and Industry, Access to Markets

Suggested Citation

Fernandes, Ana Margarida and Paunov, Caroline, Does Tougher Import Competition Foster Product Quality Upgrading? (April 1, 2009). World Bank Policy Research Working Paper Series, Vol. , pp. -, 2009. Available at SSRN: https://ssrn.com/abstract=1410479

Ana Margarida Fernandes (Contact Author)

World Bank - International Trade Division

1818 H Street, N.W.
Washington, DC 20433
United States

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

HOME PAGE: http://econ.worldbank.org/staff/afernandes

Caroline Paunov

OECD ( email )

2 rue Andre Pascal
Paris CEDEX 16, 75775
France

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