price versus quality competitiveness the triggers of competitiveness national bank of belgium...
TRANSCRIPT
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)