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Firm Productivity and Product Quality Mismatch: The Role of Processing Trade

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  • Jian Cao
  • Wei Tian
  • Miaojie Yu

Abstract

The conventional wisdom is that high‐productivity firms produce high‐quality goods. However, using Chinese firm‐level and highly disaggregated product‐level transaction trade data from 2000 to 2007, this paper finds that such thinking is invalid, particularly for capital‐intensive sectors: high‐quality products are produced by low‐productivity firms. Rich empirical search reveals that the mismatch between productivity and quality is mainly due to the role of processing trade: the productivity of processing firms is lower than that of ordinary firms, but the export quality is higher. Contingent on trade type, more productive firms export higher quality products. Further analysis demonstrates that processing firms' quality advantage stems from greater access to imported intermediate inputs. A heterogeneous trade model with novel elements of endogenously‐chosen trade type and product quality is developed to explain the empirical findings.

Suggested Citation

  • Jian Cao & Wei Tian & Miaojie Yu, 2026. "Firm Productivity and Product Quality Mismatch: The Role of Processing Trade," Review of International Economics, Wiley Blackwell, vol. 34(4), pages 877-890, September.
    • Handle: RePEc:bla:reviec:v:34:y:2026:i:4:p:877-890
    DOI: 10.1111/roie.70053
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