Import Competition, Quality Upgrading, and Exporting: Evidence from the Peruvian Apparel Industry

Pamela Medina
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Pamela Medina: UTSC and Rotman School of Management

The Review of Economics and Statistics, 2024, vol. 106, issue 5, 1285-1300

Abstract: This paper studies quality upgrading to escape competition from low-wage countries and proposes a new channel that does not rely on access to new inputs or markets. Informed by Peruvian apparel firms’ response to China’s WTO accession, I introduce factor specificity in a multi-product-firm model. Profitability losses due to competition in low-quality segments induce firms to reallocate specific factors to produce high-quality varieties for high-income countries. Gains from this channel are large. Using an observed quality measure, I show that import competition substantially increases domestic firms’ exports and high-quality export shares. Firms also reduce prices, resulting in additional welfare gains.

Date: 2024
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