Working Paper: NBER ID: w18637
Authors: Kalina Manova; Zhiwei Zhang
Abstract: We examine the global operations of multi-product firms. We present a flexible heterogeneous-firm trade model with either limited or strong scope for quality differentiation. Using customs data for China during 2002-2006, we empirically establish that firms allocate activity across products in line with a product hierarchy based on quality. Firms vary output quality across their products by using inputs of different quality levels. Their core competence is in varieties of superior quality that command higher prices but nevertheless generate higher sales. In markets where they offer fewer products, firms concentrate on their core varieties by dropping low-quality peripheral goods on the extensive margin and by shifting sales towards top-quality products on the intensive margin. The product quality ladder also governs firms ’ export dynamics, both in general and in response to the exogenous removal of MFA quotas on textiles and apparel. Our results inform the drivers and measurement of firm performance, the effects of trade reforms, and the design of development policies.
Keywords: multiproduct firms; product quality; export dynamics; trade reforms
JEL Codes: D22; F10; F12; F14; L10; L11; L15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Product Quality (L15) | Export Performance (Y10) |
| Higher Prices (D49) | Higher Sales (D49) |
| Input Quality (L15) | Output Prices (P22) |
| Higher Input Prices (L11) | Higher Output Prices (D49) |
| Quality Sorting (C69) | Firms' Export Dynamics (F14) |
| Market Conditions (D49) | Resource Allocation to High-Quality Goods (D45) |