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On the Relationship Between Quality and Productivity: Evidence from China's Accession to the WTO

Author

Listed:
  • Haichao Fan

    (Institute of World Economy, School of Economics, Fudan University, Shanghai, China)

  • Yao Amber Li

    (Division of Economics, The Hong Kong University of Science and Technology
    Institute for Emerging Market Studies, Hong Kong University of Science and Technology
    Research Affiliate of the China Research and Policy Group at University of Western Ontario)

  • Stephen R. Yeaple

    (Department of Economics, Pennsylvania State University
    Research Associate at National Bureau of Economic Research
    Research Affiliate at Ifo Institute)

Abstract

This paper presents an analysis of the effect of China's entry into the WTO on the quality choices of Chinese exporters in terms of their outputs and their inputs. Using highly disaggregated firm-level data, we show that the quality upgrading made possible by China's tariff reductions was concentrated in the least productive Chinese exporters. These firms, which had been laggards in terms of quality prior to the tariff reduction, were the most aggressive in increasing the quality of their exports and their inputs and in redirecting their exports towards high income markets where demand for high quality goods is strong. Our empirical results are consistent with a simple model featuring scale effect and non-Hicks' neutral productivity that disproportionately affects the efficiency with which firms use intermediate inputs. This latter feature does not appear in workhorse models of firm heterogeneity and endogenous quality choice which provide a distorted view of the impact of trade liberalization on quality upgrading.

Suggested Citation

  • Haichao Fan & Yao Amber Li & Stephen R. Yeaple, 2017. "On the Relationship Between Quality and Productivity: Evidence from China's Accession to the WTO," HKUST IEMS Working Paper Series 2017-46, HKUST Institute for Emerging Market Studies, revised Oct 2017.
    • Handle: RePEc:hku:wpaper:201746
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    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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