Competition and Quality Upgrading in Export Markets: The case of Peruvian Apparel Exports

This paper uses the exponential growth in Chinese exports from 2001 to 2006 to evaluate the effects of a competition shock from a low-wage competitor on exporters from a developing country. In particular, this research considers heterogeneous quality upgrading strategies of Peruvian apparel firms in response to an influx of low-cost Chinese apparel goods. Using firm-level data from Peruvian customs and a survey of Peruvian manufactures, I find that more productive firms upgrade their product quality to differentiate them from low-cost and low-quality Chinese apparel goods. Conversely, less productive Peruvian firms, which are not able to increase their quality, react by reducing their prices. Finally, I also find evidence that the average quality of Peruvian apparel products increase during 2001 to 2007.