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DECRG Trade Seminar: Does Trade Stimulate Innovation? Evidence from Firm-Product Data

Sponsor: Development Economics and Chief Economist (DEC)

Speaker: Ana Margarida Fernandes, World Bank

Summary: Innovation plays a crucial role in growth and welfare. Exposure to trade may have a significant impact on innovation. This paper investigates whether increased import competition leads firms to improve the quality of their products. The econometric analysis relies on a rich dataset of Chilean manufacturing firms and their products. Product quality is measured with unit values (prices) and industry-level transport costs are used as an exogenous proxy for import competition. The estimates show a positive and robust effect of import competition on product quality. As explicit evidence that the estimated increases in unit values capture product quality upgrading, we show that those increases are higher in cases where there is greater scope for quality differentiation. We find that reduced transport costs on intermediate inputs also lead to quality upgrading, whereas neither the effects from improved access to export markets nor strategic product market positioning explain our results. Interestingly, we find that import competition provides catch-up opportunities for firms with relatively lower quality products, lower productivity levels, and smaller size so as to reduce the gap to frontier producers.

For Information: Yasmin D Souza

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