Low-Wage Countries’ Competition, Reallocation Across Firms and the Quality Content of Exports

We consider the impact of low-wage countries’ competition on the quality content of high-wage countries’ exports. We develop a new method that uses firm-level data to measure quality changes in sectoral exports. Over 1995-2005, we measure a 11% increase in the mean quality of France’s aggregate exports. Quality upgrading is driven by a reallocation of demand in favor of higher quality producers. The phenomenon is significantly more pronounced in markets where the penetration of developing countries has increased while it goes the opposite direction where firms face increased competitive pressures from high-wage countries. These results are consistent with within-product specialization along the vertical dimension. They suggest that, over the period, France has specialized in the production of higher quality goods. In our data, around one fifth of the measured quality improvement in France’s aggregate exports is attributable to low-wage countries’ competition.