Price versus Quality competitiveness

1. Price versus Quality competitiveness The triggers of competitiveness National Bank of Belgium December 6th 2011 Matthieu Crozet

2. 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 export • About 15 to 19% of manufacturing firms • No more than 2% of producers of business services (French data)

3. Introduction • Why exporting is so difficult? • Firms clearly identify 4 main determinants of export performances

4. EFIGE SURVEY • (16,000 firms in seven different European countries) • Lower costs (21%) • Improve quality (20%) • Broaden product range (18%) • Expand distribution network (16%)

5. 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

6. Road map • Lower cost, R&D and export performances • Quality and export performances • A simple method to determine whether quality or price competition drives the selection of firms across export markets

7. 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)

8. 1. Lower cost - R&D • EFIGE Survey Internationalized firms have a higher propensity to innovate 2/3 of internationalised firms export versus only 1/3 for non-internationalizaed ones Share of firms doing R&D – Berthou and Hugot (CEPII – EFIGE)

9. Innovation and export performances • EFIGE Survey Share of firms that carried out an innovation over the period 2007-2009 Berthou and Hugot (CEPII – EFIGE)

10. Innovation and export performances Bigger, more productive and old firms are more likely to export So as firms belonging to an international group. • EFIGE Survey Firms that carried out innovation in the past are more likely to export … But the effect is 3 times larger for product innovations Berthou and Hugot (CEPII – EFIGE)

11. Innovation and export performances • EFIGE Survey … and firms that carried out process innovation export a smaller share of their turnover afterwards Berthou and Hugot (CEPII – EFIGE)

12. 1. Lower cost - R&D • This result is confirmed by Cassiman et al. (IJIO, 2010) • Large panel of small Spanish firms

13. 1. Lower cost: R&D • Exporters are more productive Cassiman et al. (IJIO, 2010)

14. 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)

16. 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

17. 2. Quality and internationalization • EFIGE Survey 61% of non-internationalized French firms have never certificated their product … only 43% of internationalized Quality certification over the reference year (2008) Berthou and Hugot (CEPII – EFIGE)

18. 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

19. 2. Quality and export performance – the example of Champagne Producers of higherquality Champagne are more likely to export Crozet, Head and Mayer (2011)

20. 2. Quality and export performance – the example of Champagne Producers of higherquality Champagne Export to more destinations Crozet, Head and Mayer (2011)

21. 2. Quality and export performance – the example of Champagne Producers of higherquality Champagne charge higherprices Crozet, Head and Mayer (2011)

22. 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

23. Does it means that quality is the main determinant of export performances? • Is lower price not important at all? • … Probably not...

24. Let ’s consider Champagne again But, even in thisveryspecificindustry, qualitycannotexplainmuch of the heterogeneity of firm-level export performances Crozet, Head and Mayer (2011)

25. 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

26. 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

27. 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

28. 3. Price versus quality sorting Theoretical intuition • Case 3. Mixed model • Both productivity and quality explain firms’ performances 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 • When the market becomes more difficult (more distant, smaller…), the most expensive firms AND the lowest quality firm wipe out

29. 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 = qualitycompetitiveness • Negative coefficient = pricecompetitiveness

30. 3. Price versus quality sorting • 1. We first confirm that, on average, richer countries export more expensive goods

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

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

33. 3. Price versus quality sorting • 3. But quality sorting prevails in country/industry pairs producing at relatively high price, on average (and vice versa)

34. 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)