QUALITY, TRADE AND MARKET COMPETITION: EVIDENCE FROM THE FOOD INDUSTRY

In the last decades globalization and the increasing international interdependence are characterizing the world economy. The global crisis of 2008 and 2009, where the volume of world trade declined by more than one-quarter, represents a clear example of how the economic fortunes of countries are strictly intertwined. Hence, it is of primary importance understanding what drives foreign trade and how trade affects the economic outcomes (Helpman, 2011). In the last years, a large body of literature seems to agree that the quality of exported products can be considered one of the key determinants of the international trade flows. A large body of evidence emphasizes that products quality affects the direction of trade, since richer countries tend to import more from countries producing higher-quality goods (Linder, 1961; Hallak, 2010; Crinò and Epifani, 2012). Moreover, the increase in market competition due to globalization leads the production of higher quality goods to be considered more often a pre-condition for export success (Helpman, 2011; Amiti and Khandekwal, forthcoming).. However, the quantification of the role of quality in explaining trade outcomes is often prevent by the lack of direct measures of quality, forcing researchers to use proxies, to make quality measurable (Schott, 2004; Hallak, 2006; Hummels and Klenow, 2005). The most common proxy on which researchers rely to measure the quality of the exported goods is unit values, according to which higher unit values reflect higher-quality products. However, there are several evidences in literature showing that unit values are imprecise measure of quality, because unit values also capture several aspects that are not attributable to quality. In this context, we analyze the extent to which product quality affects the international trade patterns exploring different issues. In the first chapter, we present a review of the literature on the role of quality in determining the trade patterns. We focus in particular on the quality sorting models, that represent an extension of the seminal “firm heterogeneity” model proposed by Melitz (2003). In the last section of the chapter, we present the Crinò and Epifani (2012) model, on which it is built the empirical exercise proposed in the second chapter. Such a model extends the heterogeneous-firm’s model a la Melitz (2003) by incorporating firms heterogeneity in product quality and non-homothetic preferences. In the second chapter, we empirically investigate the relationship between product quality and food export performance using an alternative approach to infer product quality. Specifically, it is made use of a (unbalanced) panel of roughly 750 Italian food firms, observed in the period 2001-2006. The main advantage of this dataset is that it allows the construction of a large set of firm-level variables, strictly correlated with product quality, like investment intensity, R&D expenditure, product and process innovations, as well as quality standard certifications. Using this data it has been studied the relationship between Total Factor Productivity (TFP), product quality and firms export across destinations, relying on the theoretical model developed by Crinò and Epifani (2012). Moreover, it is studied the relationship for both the overall food industry and the ‘sub-samples’ related to firms producing typical ‘Made in Italy’ and ‘Protected Designation of Origin’ (PDO) products, in order to investigate if the perceived quality of these two product aggregations really matters for firms export behavior. We found strong support for the key model prediction, namely product quality matters for export performance. Specifically, this work reveals robust evidence that the correlation between export intensity and TFP/quality increases with the per-capita income of foreign destinations. Thus, more efficient firms have higher export performance as they use more expensive and quality inputs to sell higher-quality goods at higher prices. In the third chapter, we deal with the quality measurement issue. After a review over the most common approaches used in the economic literature, we present an innovative method proposed by Khandelwal (2010) to infer product quality using price and quantity information from trade data. This methodology, based on the nested logit framework of Berry (1994), has this straightforward intuition: “conditional on price, imports with higher market shares are assigned higher quality”. Relying on such method, we make use of trade data from the Eurostat-Comext database, to infer the quality of the imported agri-food products in the EU 15 countries at the country-product (CN 8-digit) level. We show that, even using different destination countries and focusing on a specific (food) industry, our quality estimate results match the ones of Khandelwal (2010). Moreover, through different exercises and examples, we showed that our quality estimations can be considered reasonable realistic and, thus, particularly useful in assessing the role of product quality in influencing the trade patterns. In chapter 4, the product quality estimates will be used to analyze to what extent an increase in the level of competition (expressed by a reduction in import tariffs) in the origin country, affects the quality of the exported food products in the EU15. More specifically, using the country-product measure of quality, estimated in Chapter 3, we rely on the approach proposed by Amiti and Khandelwal (forthcoming), by studying the relationship between quality upgrading and competition within a model of ‘distance to the frontier’ of Aghion et al. (2005; 2009). These authors argued that the relationship between competition and innovation is non-monotonic and conditional to the firm/product distance from the (world) technology frontier. Moreover, we extend this approach studying the extent to which the level of voluntary standards in the EU 15 affects the competitive environment in the exporting market, namely, if standards act as a catalyst (thus increasing the level of competition) or as a barrier to trade. Main results show that trade liberalization in exporting countries boosts the rate of quality upgrading for varieties close to the quality frontier. These results hold true for both OECD and non-OECD countries, by using alternative measures of the world quality frontier and of the quality upgrading. Moreover, we find, on average, a positive effect of EU standards on the rate of quality upgrading of the exported products, a results that is only marginally affected by the products distance from the world quality frontier.