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 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

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 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

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 EFIGE Survey Berthou and Hugot (CEPII – EFIGE) Bigger, more productive and old firms are more likely to export So 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

11. 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

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 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

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 Crozet, Head and Mayer (2011) Producers of higher quality Champagne are more likely to export

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

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

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 Crozet, Head and Mayer (2011) But, even in this very specific industry, quality cannot explain much of the heterogeneity of firm-level export performances

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 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

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 = quality competitiveness Negative coefficient = price competitiveness

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)