Regional reputation for quality and corporate export performance

YE Di1 ZHU Linke1

(1.College of Business, Shanghai University of Finance and Economics 200082)

【Abstract】China’s exports have been growing rapidly during the last decades. However, room for further export growth is shrinking due to costlier labor, the development of manufacturing in other developing countries like Vietnam and India, the appreciation of the RMB and intensified trade frictions. As such, how to transform and upgrade export structure is an urgent problem faced by China. However, with the upgrading of the quality of export products, quality information asymmetry will become a more important problem. In international trade, due to spatial distance and differences in language, systems, cultures and other factors, the information asymmetry on product quality has become more severe. When it is difficult to fully identify the quality of an individual firm, buyers may consult the reputation of the group to which that firm belongs as a source of information. Regions and industries are often used as natural criteria for dividing groups, which makes regional and national reputation for product quality potentially important for exporting. Unfortunately, “made in China” is currently a sign of low quality. Thus, improving country or regional reputation is a pressing problem that must be solved for China. This paper shows that a regional reputation for quality has an important impact on the performance of firm exports in China; thus, it provides indirect evidence of the importance of country reputation for export performance. On the issue of a “national quality reputation,” Cage & Rouzet (2015) stressed that a country’s “low quality” label puts it into a “low-quality trap.” Chisik (2003) pointed out that national quality reputation is a source of comparative advantage. However, the impact of regional reputation of export quality has mainly been investigated by theorists, and little empirical study has been conducted. The main contribution of this paper is to make up for this gap in the research. Based on Chinese export enterprise data, we use the average export quality of neighboring firms in the same region of the same product as a proxy for regional quality reputation and link it with the export performance of enterprises. We find that higher regional quality reputation leads to higher exports of firms in that region. This finding is robust to controlling for trade costs, regional supply shocks, demand shocks in destination countries and other potential endogeneity problems. This positive impact comes from a rather intuitive mechanism: in the presence of asymmetric information that makes buyers unable to fully identify the product quality of individual exporters, the belief in the average quality of the exporter (which is affected by regional reputation) should affect the buyer’s purchasing behavior (Akerlof, 1970) .The current paper empirically verifies this implication from several angles. First, regional reputation has a greater impact on domestic firms, as the quality information asymmetry of domestic firms is higher than that of foreign enterprises. Second, firms whose product quality is higher have greater capacity and motivation to signal the quality of their products and are less dependent on regional quality reputation. Third, the impact of regional quality reputation is greater for firms that export to more distant countries because they may face higher levels of information asymmetry. Fourth, firms that export through trade intermediaries are more affected by regional quality reputation than firms that export directly. We also find that regional quality reputation has a positive impact on product price. This evidence is consistent with the hypothesis that regional quality reputation is helpful for firms to overcome quality information asymmetry and improve export performance. The results of this study indicate that with the upgrading of export product quality, local Chinese governments must pay more attention to the cultivation of “regional quality reputation,” which is a regional public good. Similarly, the Central Government of China must help to cultivate a “national quality reputation” to improve the reputation of “made in China” and to avoid falling into the “low-quality trap.”

【Keywords】 information asymmetry; quality; regional quality reputation; export;

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    Footnote

    [1]. ① This paper makes a statistical analysis of the changes in the time dimension in the average quality of products produced by enterprises in the region. The legend involved is not listed here due to space limitations. Readers who are interested can request from the author.

    [2]. ① The explained variable can also be replaced by export volume. Since the price of the product is controlled, the meaning of the export volume and the export value is the same.

    [3]. ② Since the value of the quality may be negative (see below), the natural logarithm is not taken.

    [4]. ③ Other factors such as human capital differences, and industrial policies that vary from city to city are controlled by the exporter’s own product price (variable price) and product quality (variable quality).

    [5]. ① As for the product’s alternative elasticity σ, this article uses the data provided by Broda & Weinstein (2006).

    [6]. ① This is also in line with the conclusion of Melitzs (2003): Exports with high trade costs have high fixed costs, so only high-productivity firms have the ability to export. Exporters with higher trade costs have higher average productivity, which is usually positively related to product quality, so regions with higher trade costs should also have higher average quality of export products.

    [7]. ① The export performance of a single company may affect the average quality of the surrounding companies.

    [8]. ① The coefficient before nearqualityfhrc, t-1 in Table 5 is significantly increased. The possible reason is that ln(regionvaluehrc, t-1) controls the competitive effect brought by the quality changes of surrounding enterprises to some extent.

    [9]. ② Due to space limitations, this paper does not report the specific results of these two robustness tests, which are available upon request.

    [10]. ① http://www.cepii.fr/cepii/en/bdd_modele/presentation.asp?id=6, CEPII database contains three kinds of distance metrics. We use the weighted average distance between the major cities of countries with the weight of population distribution of major cities to measure the distance from the export destination.

    [11]. ② It is calculated based on 2005 export data.

    [12]. ③ Table 6 shows only the results of the robustness test that changes the lower limit of the number of companies around. In addition, we have done a robustness test to remove large enterprises, control the number and size of surrounding companies, and examine the balance panel data. The results are still robust. Due to space limitations, the specific results of these robustness tests are not listed, which are available upon request.

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This Article

ISSN:0577-9154

CN: 11-1081/F

Vol 52, No. 06, Pages 105-119

June 2017

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Article Outline

Abstract

  • 1 Introduction
  • 2 Literature review
  • 3 Model settings, data sources and variable descriptions
  • 4 Basic regression results and robustness tests
  • 5 Heterogeneity of the effect of “regional quality reputation” under different conditions
  • 6 Impact of “regional quality reputation” on the export price
  • 7 Conclusion
  • Footnote

    References