QUALITY, TRADE AND MARKET COMPETITION: EVIDENCE FROM THE FOOD INDUSTRY

In the last decades globalization and the increasing international interdependence are characterizing the world economy. The global crisis of 2008 and 2009, where the volume of world trade declined by more than one-quarter, represents a clear example of how the economic fortunes of countries are strictly intertwined. Hence, it is of primary importance understanding what drives foreign trade and how trade affects the economic outcomes (Helpman, 2011). In the last years, a large body of literature seems to agree that the quality of exported products can be considered one of the key determinants of the international trade flows. A large body of evidence emphasizes that products quality affects the direction of trade, since richer countries tend to import more from countries producing higher-quality goods (Linder, 1961; Hallak, 2010; Crinò and Epifani, 2012). Moreover, the increase in market competition due to globalization leads the production of higher quality goods to be considered more often a pre-condition for export success (Helpman, 2011; Amiti and Khandekwal, forthcoming).. However, the quantification of the role of quality in explaining trade outcomes is often prevent by the lack of direct measures of quality, forcing researchers to use proxies, to make quality measurable (Schott, 2004; Hallak, 2006; Hummels and Klenow, 2005). The most common proxy on which researchers rely to measure the quality of the exported goods is unit values, according to which higher unit values reflect higher-quality products. However, there are several evidences in literature showing that unit values are imprecise measure of quality, because unit values also capture several aspects that are not attributable to quality. In this context, we analyze the extent to which product quality affects the international trade patterns exploring different issues. In the first chapter, we present a review of the literature on the role of quality in determining the trade patterns. We focus in particular on the quality sorting models, that represent an extension of the seminal “firm heterogeneity” model proposed by Melitz (2003). In the last section of the chapter, we present the Crinò and Epifani (2012) model, on which it is built the empirical exercise proposed in the second chapter. Such a model extends the heterogeneous-firm’s model a la Melitz (2003) by incorporating firms heterogeneity in product quality and non-homothetic preferences. In the second chapter, we empirically investigate the relationship between product quality and food export performance using an alternative approach to infer product quality. Specifically, it is made use of a (unbalanced) panel of roughly 750 Italian food firms, observed in the period 2001-2006. The main advantage of this dataset is that it allows the construction of a large set of firm-level variables, strictly correlated with product quality, like investment intensity, R&D expenditure, product and process innovations, as well as quality standard certifications. Using this data it has been studied the relationship between Total Factor Productivity (TFP), product quality and firms export across destinations, relying on the theoretical model developed by Crinò and Epifani (2012). Moreover, it is studied the relationship for both the overall food industry and the ‘sub-samples’ related to firms producing typical ‘Made in Italy’ and ‘Protected Designation of Origin’ (PDO) products, in order to investigate if the perceived quality of these two product aggregations really matters for firms export behavior. We found strong support for the key model prediction, namely product quality matters for export performance. Specifically, this work reveals robust evidence that the correlation between export intensity