Low-wage country competition and the quality content of high-wage country exports

We study how competition from low-wage countries in international markets affects the quality content of high-wage country exports. We focus on aggregate quality changes driven by a reallocation of sales from low- to high-quality exporters, within industries. Two alternative indicators are used on firm-level data to measure quality changes. Both lead to similar conclusions. Namely, we show that the mean quality of French exports increased by 10–15% between 1995 and 2005. Quality improvement is significantly more pronounced in markets in which competition from low-wage countries has increased the most. This holds true for various specifications including two different identification strategies. The results are consistent with competition from low-wage countries leading developed countries to specialize within industries in the production of higher quality goods. •Propose two methods to measure quality changes in French firm-level data•Focus on quality changes driven by reallocation of market shares across firms•Relate quality changes to competitive pressures from low-wage countries (LWC)•IV and difference-in-difference estimates show that LWC competition pushes quality up.•LWC competition leads France to specialize in high-quality exports.