| Summary: | Over the past two decades,
globalization, and more specifically the increased exposure
to competition from low-price producers in China and India,
has created a new economic environment for other emerging
economies. The most advantageous way for manufacturing firms
in those economies to position themselves in domestic and
international markets is to offer upgraded and
differentiated rather than "mundane"
labor-intensive products. This paper investigates whether
increased competitive pressure from imports forces firms to
improve the quality of their products. The econometric
analysis relies on a rich dataset of Chilean manufacturing
plants and their products. Product quality is measured with
unit values (average prices) and industry-level transport
costs are used as an exogenous measure of import
competition. The authors find a positive and robust effect
of import competition on product quality. This effect is
found to be particularly strong for non-exporting plants.
The results also show that increased import competition from
less advanced economies is the major cause for the positive
impact on quality upgrading. The overall evidence points to
the benefits of trade openness for product innovation but
demonstrates at the same time that competitive pressure
alone will not enable local plants to catch up with leading
world producers.
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