Destination and source countries: Do they have a role on product quality?

In this work we explore the link between export and import products quality and the level of income of destination and source countries. As proxy to quality we use a firm-level measure calculated from the unit value prices of both exports and imports of Uruguayan manufacturing firms. Previous works argue that high quality products are exported to and imported from high income countries. Moreover, it is also argued that firms that export to high income countries upgrade their quality by using imports from high income countries. We test these hypotheses using a rich database for Uruguay over the period 1997-2008. This dataset combines firm level data and detailed customs data of exports and imports by destination or origin country. To analyze causal associations we use instrumental variable techniques, and utilize real exchange rate fluctuation to construct the instruments. Our results show that exporting to high income countries has a negative effect on the quality of imported goods and that importing from high income countries has a positive effect on our measure of import quality.