Quality upgrading of Italian manufactures: evidence from firms� prices and strategies

Even before the global crisis, the Italian economy was in difficulties internationally, but slow growth and a declining share of world trade were accompanied by a perceptible process of manufacturing transformation. This paper, using data from the Bank of Italy�s survey of manufacturers, measures a crucial aspect of the transformation, namely quality upgrading, from 2000 to 2006. The gauge of upgrading, not used in earlier literature, is the portion of price changes representing the return to value creation, both tangible (new products and improvement of existing ones) and intangible (branding policies). We find evidence of upgrading capable of explaining a quarter of the firms� average annual price increases (about 0.5 out of 2 percentage points), with roughly equal effects from the tangible and the intangible components. The analysis also shows that strategies of product upgrading helped foster job creation and sales growth.