Export product quality and markup of firms: evidence from China

In this study, we analyse how export product quality affects the markup of firms. First, on the basis of the heterogeneous firm trade model, we clarify the internal mechanism of the effect of export product quality on the markup of firms through the channels of firm marginal production cost and product pricing. Second, using the micro data of Chinese firms from 2000 to 2007 and by estimating firm-level markup and export product quality, we construct a dynamic panel model to empirically analyze the impact of export product quality on the markup of the Chinese firms and mechanism of the impact. Results of the empirical analysis support the prediction of the theoretical model, that is, improvement of export product quality will positively affect the markup of firms by increasing their marginal cost of production and product pricing. From the product quality perspective, we provide new insights for understanding the impact of the export market on the markup of firms.