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China Quality Shock: Indonesian Firm Productivity under Global Quality Competition from China


E2018005                                                   2018-01-30

Lili Yan Ing    Miaojie Yu    Rui Zhang*


Competing against rivals with better product qualities can increase firm-level productivity via a pro-competitive effect. This paper studies the impact of China’s export expansion on Indonesian firms’ productivity, paying particular attention to variation in China’s export quality. The paper develops a new procedure to measure firm-destination-product-year-level export quality, which is based on a theoretical framework highlighting firms’ optimal quality choice as the outcome of the trade-off between production cost and per-unit trade cost interacted with consumers’ taste for quality. The study then uses disaggregated data from Indonesia and China to construct a firm-specific indicator that measures quality competition from China faced by an Indonesian firm in the global market. The new measure allows studying how global quality competition from China over time affects an Indonesian firm’s productivity. The results suggest that increasing quality competition from China leads to increased firm-level total factor productivity of Indonesian firms. The results are robust when the analysis controls for output tariff, input tariff, and quality competition from other countries. The effect is more likely to emerge for less concentrated industries, and multi-product firms react to increased global quality competition from China by dropping products. The paper also finds that such an effect mainly exists in continuing firms. The results specify an important channel for productivity gains from trade through quality competition and reveal a new dimension for understanding the impact of China’s exports.

Key words: Quality, Productivity, Pro-competitive Effect, Gains from Trade

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* Lili Yan Ing, Economist, Economic Research Institute for ASEAN and East Asia (ERIA), Email:; Miaojie Yu, Professor, China Center for Economic Research, Peking University, Email:; Rui Zhang, PhD Candidate, China Center for Economic Research, Peking University, Email: