The quality and the destination of the colombian manufacturing exports

ABSTRACT

In this paper, we describe the relationship between the quality of goods and inputs of the Colombian manufacturing firms and the income level of their export markets. We show that there is a positive correlation between measures of product and input quality and measures of per capita income of export markets. In particular, the results suggest that the taste for quality is correlated with income, and that the quality of manufactured products is correlated with the quality of the inputs used to produce them. These findings are consistent with the recent literature on the demand and supply of quality, and with evidence for other countries.

KEYWORDS:

• Quality of products
• quality of inputs
• wages
• income of countries

JEL CLASSIFICATIONS:

• F14
• L6

Acknowledgments

The authors are members of the Centro de Estudios sobre Economía Industrial e Internacional (CEEII) of the Banco de la República (the Central Bank of Colombia). We thank the editor and an anonymous referee for their insightful comments. The views expressed in this document are the sole responsibility of the authors and do not represent the views of Banco de la República, its Governor or its Board of Directors.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 These papers are related with a much broader literature that studies the relationship between exports and firms' characteristics (for example, Yeaple 2005; Helpman, Itskhoki, and Redding 2010; Lileeva and Trefler 2010; Bustos 2011).

2 A previous paper by Verhoogen (2008) showed the relationship between wages and export destination based on a similar mechanism.

3 Notice that σ and ξ are parameters of the cost function of quality provision that jointly determine the returns of the quality provision.

4 We should emphasize that the model implies that wealthier countries import higher quality goods which are produced with higher quality inputs. The causal relationship between the income of individual export markets and the quality of goods produced in one of the countries that export to these markets is more subtle. An income shock to an export market will increase its demand for higher quality goods. Whether an individual country will increase or not its production of higher quality goods will depend on the technology that this country's firms which in the model is embedded in equation (6(6) $c_j({\theta }_j)={\displaystyle \frac{1}{l}}({\displaystyle \frac{{\theta }_j}{{\lambda }_j}}{)}^{\frac{1}{\xi \sigma }}$(6) ).

5 Firms must report their financial data if their assets and/or income are grater than 30 000 times the current legal monthly minimum wage, if their external liability is greater than the total assets, if their financial expenditures are at least 50% of their income, if their cash flow is negative, or if their losses reduce the net equity below 70% of the social capital. During our sample period the minimum monthly wage oscillated between 165 dollars in 2005 and 315 dollars in 2012 and 2013.

6 The income groups are: low income, $\mathrm{\$}1035$ or less; lower middle income, $\mathrm{\$}1036$–4085; upper middle income, $\mathrm{\$}4086$–12, 615; and high income, $\mathrm{\$}12,616$ or more. We focus on the distinction between high-income countries and the rest.

7 The control variables used are the productivity of the firms, the value of total exports of the firm in Colombian Pesos (expo), the value of total revenue of the firm (revenues), and total value of the intermediate consumption of the firm (interm_consm).

8 The paper by Fieler, Eslava, and Xu (2018) estimates a model that links exporters and importers through product quality using Colombian data, similar to the data we use.