Comparative advantage and the quality choice of heterogeneous firms

This paper examines how trade openness affects firms’ product quality across industries based on a country’s comparative advantage. We develop a Heckscher-Ohlin model with heterogeneous firms and endogenous quality upgrading. Trade openness affects a firm’s product quality differ- ently within an industry based on the firm’s export status. In particular, trade openness increases exporters’ product quality and reduces the quality from non-exporting firms. These effects are not homogeneous across industries; they are more pronounced in a country’s comparative advan- tage industry. We test the main predictions of the model using transaction-level data of Chinese exports. Consistent with our theoretical predictions, we find that Chinese exporters export higher quality products in those industries in which China reveals a comparative advantage.