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Does tougher import competition foster product quality upgrading ?
 
Author:Fernandes, Ana M.; Paunov, Caroline; Collection Title:Policy Research working paper ; no. WPS 4894
Country:World; Date Stored:2009/04/06
Document Date:2009/04/01Document Type:Policy Research Working Paper
Language:EnglishMajor Sector:Education; Information and communications; Industry and trade
Rel. Proj ID:1W-Trade And Technical Change -- -- P077506;Region:The World Region
Report Number:WPS4894Sub Sectors:General education sector; General information and communications sector; General industry and trade sector
SubTopics:Transport Economics Policy & Planning; Markets and Market Access; Economic Theory & Research; Water and Industry; Access to MarketsTF No/Name:TF029214-PHRD-DIVERSIFIED AGRICULTURAL SUPPORT
Volume No:1 of 1  

Summary: 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.

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