Price versus Quality competitiveness

The triggers of competitivenessNational Bank of Belgium

December 6th 2011

Matthieu Crozet

Introduction

Carlo Altomonte and Gianmarco Ottaviano shown that:

Firm-level export performance is the key determinant of competitiveness

Exporting is not a commonplace activity

Only a few firms exportAbout 15 to 19% of manufacturing firmsNo more than 2% of producers of business services

(French data)

Introduction

Why exporting is so difficult?

Firms clearly identify 4 main determinants of export performances

EFIGE SURVEY(16,000 firms in seven different European countries)

- Lower costs (21%)

- Improve quality (20%)

- Broaden product range (18%)

- Expand distribution network (16%)

Introduction

Firms consider that lower cost is the main determinant of competitiveness

But non-price determinants of foreign demand (quality and product range) is also very important

This talk: Discusses the determinants of firm-level export

performances within a country and industry Shows some facts in order to assess the relative

importance of prices and quality competitiveness

Road map

1. Lower cost, R&D and export performances

2. Quality and export performances

3. A simple method to determine whether quality or price competition drives the selection of firms across export markets

1. Lower cost

Firms report that lower cost is one of the main determinants of competitiveness

However, all firms in a given country and industry face the same factor supply conditions.

Then, lowering cost, within a country/industry might be two things:

A better production technology, which is related to R&D

A more efficient input-mix (higher skill or capital intensity)

1. Lower cost - R&D

EFIGE Survey

Share of firms doing R&D – Berthou and Hugot (CEPII – EFIGE)

Internationalized firms have a

higher propensity to innovate

2/3 of internationalised

firms export versus only 1/3 for

non-internationalizaed

ones

Innovation and export performances EFIGE Survey

Share of firms that carried out an innovation over the period 2007-2009

Berthou and Hugot (CEPII – EFIGE)

Innovation and export performances EFIGE Survey

Berthou and Hugot (CEPII – EFIGE)

Bigger, more productive and old firms are more likely to exportSo as firms belonging to an

international group.

Firms that carried out innovation in the past are more likely to export

… But the effect is 3 times larger for product innovations

Innovation and export performances EFIGE Survey

Berthou and Hugot (CEPII – EFIGE)

… and firms that carried out process innovation export a smaller share of their turnover afterwards

1. Lower cost - R&D

This result is confirmed by Cassiman et al. (IJIO, 2010)

Large panel of small Spanish firms

1. Lower cost: R&D

Exporters are more productive

Cassiman et al. (IJIO, 2010)

1. Lower cost: R&D

But, strangely, process innovation does not improve TFP Econometric results show that product innovation have

much more import on exports than process innovation

Cassiman et al. (IJIO, 2010)

1. Lower cost - R&D

These findings suggest that R&D is important for improving export performances…

… not really because R&D lowers the production cost…

… but more probably because R&D changes the products the firm supplies: Improves the quality Creates new products

2. Quality and internationalization EFIGE Survey

Berthou and Hugot (CEPII – EFIGE)

Quality certification over the reference year (2008)

61% of non-internationalized French firms have never certificated their product

… only 43% of internationalized

2. Quality and export performance – the example of Champagne

In most cases, it is not possible to have reliable data on firm-level quality of the products

But it is possible for some kinds of goods

e.g. Wines, where experts (like Parker) evaluate explicitly the quality of each product

2. Quality and export performance – the example of Champagne

Crozet, Head and Mayer (2011)

Producers of higher quality Champagne

are more likely to export

2. Quality and export performance – the example of Champagne

Crozet, Head and Mayer (2011)

Producers of higher quality Champagne Export to more destinations

2. Quality and export performance – the example of Champagne

Crozet, Head and Mayer (2011)

Producers of higher quality Champagne charge higher prices

2. Quality and export performances Other evidences on such a positive relationship

between prices and export performances:

Iacovone and Javorcik (2010): Mexican firms that export a variety obtain a price premium for their domestic sales of this variety… and price increases two years before the firm starts to export.

Manova and Zhang (2011): Chinese exporters that charge higher prices export more, to more destinations

Does it means that quality is the main determinant of export performances?

Is lower price not important at all?

… Probably not...

Let ’s consider Champagne again

Crozet, Head and Mayer (2011)

But, even in this very specific industry, quality cannot explain much of the heterogeneity of firm-level export performances

3. Price versus quality sorting Baldwin and Harrigan (2011) and Baldwin and Ito

(2008) propose a simple method to classify trade flows according to the nature of the competitiveness that prevails

= determine, for each exporting country and industry whether firms’ relative performance abroad is mainly driven by lower prices or higher quality

3. Price versus quality sorting

Theoretical intuition Case 1. Heterogeneity in terms of productivity (Melitz, 2003)

Firms that are able to charge a lower price are more efficient They have a higher probability to export

When the market becomes more difficult (more distant, smaller…), the most expensive firms wipe out.

This extensive margin effect involves that country-level export price decreases with the “difficulty” of the market

3. Price versus quality sorting

Theoretical intuition Case 2. Heterogeneity in terms of quality (B&H, 2011)

Firms able to charge a produce a higher quality are more efficient They have a higher probability to export

When the market becomes more difficult (more distant, smaller…), the least expensive firms wipe out.

This extensive margin effect involves that country-level export price increases with the “difficulty” of the market

3. Price versus quality sorting

Theoretical intuition Case 3. Mixed model

Both productivity and quality explain firms’ performances

When the market becomes more difficult (more distant, smaller…), the most expensive firms AND the lowest quality firm wipe out

Price competitiveness should prevail in country-industry pairs where firms are specialized in high quality varieties Quality competitiveness should prevail in country-industry pairs where firms are specialized in low quality varieties

3. Price versus quality sorting Crozet, Hatte, Zignago:

Use a worldwide bilateral trade database at the product level (BACI-CEPII) 50 exporting countries ; 2,500 manufacturing products ; = 90% of

world trade

For each pair of exporting country and industry, we estimate the relationship between the average export price by destination and the “difficulty” of the destination market We obtain 95,670 estimated coefficients Positive coefficient = quality competitiveness Negative coefficient = price competitiveness

3. Price versus quality sorting 1. We first confirm that, on average, richer countries

export more expensive goods

3. Price versus quality sorting 2. Quality sorting is not really predominant in rich countries

3. Price versus quality sorting 2. Quality sorting is not really predominant in rich countries

3. Price versus quality sorting 3. But quality sorting prevails in country/industry pairs

producing at relatively high price, on average (and vice versa)

3. Price versus quality sorting

In a nutshell: In an industry which is specialized in high quality

varieties, firms that have the ability to produce at a relatively low price have greater export performances (are more likely to export to more destinations)

In an industry which is specialized in low quality varieties, firms that have the ability to produce a relatively high quality have greater export performances (are more likely to export to more destinations)