New Evidence on Product Quality and Trade

40 Pages Posted: 26 Nov 2006  

Hasan Faruq

Indiana University Bloomington - Department of Economics

Date Written: November 22, 2006

Abstract

This paper examines why different countries export different qualities of products. Previous studies have attributed quality dispersion to differences in factor endowments while no empirical work has been done examining the effect of technology on quality. Using panel data on U.S. imports from 58 countries, we find that the export of high quality differentiated goods is associated with both higher stock of physical capital endowments and research and development (R&D) activities. We also observe that foreign direct investment (FDI) has a positive effect on quality, which is consistent with the literature on FDI and intra-industry trade. These results cannot be replicated by using the reduced form OLS price regression which is commonly used in the literature. Instead, we use a two-equation system in price and quantity to identify the determinants of quality.

Keywords: Product Quality, Differentiated Products, Heckscher-Ohlin Model, R&D

JEL Classification: L15, F11, Q16

Suggested Citation

Faruq, Hasan, New Evidence on Product Quality and Trade (November 22, 2006). CAEPR Working Paper No. 2006-019. Available at SSRN: https://ssrn.com/abstract=946767 or http://dx.doi.org/10.2139/ssrn.946767

Hasan Faruq (Contact Author)

Indiana University Bloomington - Department of Economics ( email )

Wylie Hall
Bloomington, IN 47405-6620
United States

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