Unit 3 Micro: Top Firms Target the Rich

The most innovative and productive firms send their exports to the world’s richest countries. That is the central finding of research by Rosario Crinò and Paolo Epifani, published in the latest issue of the Economic Journal. Their analysis of a representative sample of Italian manufacturing firms suggests that what firms produce – and how they produce it – is closely related to where they sell it.

This has important implications, particularly for manufacturers in poorer countries, for whom quality upgrading may be a prerequisite for effective access to richer countries’ markets. Moreover, the research suggests, trade liberalisation between richer and poorer countries may have a limited impact on rich countries’ industrial structure.

The study documents some new and perhaps surprising facts about the pattern of firms’ exports across destinations. In particular, analysing a reliable dataset used in other studies, it finds a strong and robust negative correlation between firms’ productivity and their share of total exports to low-income destinations. This fact seems at odds with the common wisdom, positing that only the most productive firms are profitable enough to break into harder-to-reach destinations.

The researchers argue that this and other empirical regularities can arise from the interplay between cross-firm heterogeneity in product quality and cross-country heterogeneity in quality consumption.