Food Processing Firms, Input Quality Upgrading Eric Tseng and Ian - - PowerPoint PPT Presentation

Food Processing Firms, Input Quality Upgrading and Trade

Eric Tseng and Ian Sheldon Virginia Tech AAEC Seminar, April 17th, 2015

Motivation - Quality Matters

❖ Quality an important determinant of trade flows (Linder 1961) ❖ Schott (2004) and Hummels & Klenow (2005) link exporter GDP

per capita and product quality

❖ Hallack (2006) links product quality to importer GDP per capita ❖ Manova & Zhang (2012) show successful exporting firms in

China use higher-quality intermediate inputs to produce higher-quality goods and firms vary quality of produces across destination markets

❖ Vertical product differentiation matters and should be modeled

Motivation - Food Markets

❖ Food markets no longer characterized by homogenous products (Sexton 2013) ❖ Food quality matters, and firms in food industry use vertical product

differentiation strategies

❖ Sunk costs related to production capacity and product quality matter ❖ Curzi, Raimondi & Olper (2014) investigate impact of trade liberalization on

food product-quality

❖ Trade liberalization in exporting countries leads to faster upgrading of

product quality for products closer to technology frontier

❖ On average, EU voluntary food-quality standards have positive effect on

rate of quality upgrading

Goals of Analysis

❖ Use modified heterogenous-firms framework allowing

for intermediate input markets (Kugler & Verhoogen, 2012)

❖ Extend to focus on food quality and quality of

agricultural inputs (Sexton, 2013), the impact of trade liberalization on food product-quality (Curzi et al, 2014)

❖ Examine closely relationship between food product-

quality, trade liberalization, and ability of firms to upgrade quality of final goods

Model - Consumers

❖ Consumers: ❖ Utility


❖ Demand


(1) U = q(ω)x(ω)

( )

σ −1 σ dω ω∈ Ω

∫

⎡ ⎣ ⎢ ⎤ ⎦ ⎥

σ σ −1

(2) x(ω) = Xq(ω)σ −1 pO(ω) P ⎛ ⎝ ⎜ ⎞ ⎠ ⎟

−σ

Model - Firms

❖ Firms ❖ Intermediate agricultural good produced via

production function:
 


❖ Since intermediate input market is perfectly

competitive, then

I

(3) F

I(A,c) = A

c

pI(c) = c

Model - Firms

❖ Food processors (final good producers) require fixed

investment cost to obtain capability , where is
 
 drawn from Pareto distribution with , 


❖ Firms must pay fixed costs to enter market, , and also

incur fixed cost of exporting in all periods fe

λ λ

G(λ) = 1− λm λ ⎛ ⎝ ⎜ ⎞ ⎠ ⎟

k

0 < λm ≤ λ f fx

Model - Firms

❖ Firms use inputs of capability, intermediate agricultural input and

composite input of specific quality

❖ : additional tangible input that affects firm quality choice, i.e.,

capital equipment required to ensure quality control

❖ Production function for final good is:


φ

φ

F(n) = nλ a φ (4) MC = φpI(c) λ a MCX = τφpI(c) λ a

Model - Firms

❖ Food processors constrained by quality choice ❖ Inputs as complements in determining quality of

good (Kremer, 1993; Kugler & Verhoogen, 2012)
 


(5) q = 1 3 λ b

( )

β + 1

3 φ 3

( )

β + 1

3 c3

( )

β

⎡ ⎣ ⎢ ⎤ ⎦ ⎥

Model - Firms

❖ The importance of ❖ is the scope of product-quality differentiation,

approximating fixed costs of investment required to translate capability into product quality

❖ Additional channel impacting firms’ quality choices,

where lower restricts available quality choices, while higher has higher available quality choices
 
 b b b b

Equilibrium

❖ Profit maximization yields following:



 
 
 
 
 
 
 
 
 
 
 (7a) c*(λ) = pI

*(λ) = λ b 3

(7b) φ*(λ) = λ

b 3

(7c) q*(λ) = λ b (7d) pO

* (λ) =

σ σ −1 ⎛ ⎝ ⎜ ⎞ ⎠ ⎟ λ

2b 3 −a

pO,X

* (λ) =

σ σ −1 ⎛ ⎝ ⎜ ⎞ ⎠ ⎟τλ

2b 3 −a

(7e) r*(λ) = 1+ Zτ 1−σ

( ) σ −1

σ ⎛ ⎝ ⎜ ⎞ ⎠ ⎟

σ −1

ληXPσ , η ≡ σ −1

( ) b

3 + a ⎡ ⎣ ⎢ ⎤ ⎦ ⎥

Comparative Statics

❖ Comparative statics regarding effects of parameters on firm

size and final good quality choice
 
 
 
 
 
 
 
 


(8a) ∂lnr* ∂τ = 1−σ

( )Zτ −σ

1+ Zτ 1−σ

( )

2 < 0, and ∂lnq*

∂τ = b 1−σ

( )Zτ −σ

η 1+ Zτ 1−σ

( )

2 < 0

(8c) c*(λ) = φ*(λ) = λ

b 3

(8b) ∂lnr* ∂b = σ −1

( )

3 lnλ > 0, and ∂lnq* ∂b = lnλ > 0

Comparative Statics

❖ Comparative statics imply: ❖ Firms’ size (i.e., revenue) and the quality choice of

final good increase with falling trade costs

❖ A firm that is better able to translate capability into

quality produces higher-quality goods and is larger

❖ Trade costs negatively impact quality choice

Comparative Statics

Comparative Statics

❖ Comparative statics examining impact of trade liberalization and ability to

translate capability on export entry cutoff point

❖ (11) states falling trade costs induce most productive non-exporting firms to

enter export market, and least productive firms forced out of market, as exporting firms now capture larger market share

❖ Classic heterogenous-firms result (see Melitz, 2003)

(11a) ∂lnλ* ∂lnτ = k 1−σ

( )

η λm fη δ fe k −η

( )

f fx ⎛ ⎝ ⎜ ⎞ ⎠ ⎟

k−η η

τ

k 1−σ

( )−η

η

< 0 (11b) ∂lnλx

*

∂lnτ = σ −1 η λ* fx f ⎛ ⎝ ⎜ ⎞ ⎠ ⎟

1 η

τ

σ −η−1 η

> 0

Comparative Statics

❖ Comparative statics examining impact of trade liberalization

and ability to translate capability on market entry cutoff point

❖ These results are ambiguous in sign, due to other parameters

(12a) ∂λ* ∂b = 3kτ

−k b 3+a

λm f δ fe ⎛ ⎝ ⎜ ⎞ ⎠ ⎟ ln f fX ⎛ ⎝ ⎜ ⎞ ⎠ ⎟ − σ −1

( )lnτ

⎛ ⎝ ⎜ ⎞ ⎠ ⎟ f fX ⎛ ⎝ ⎜ ⎞ ⎠ ⎟

k η

Λ − ρ f fX ⎛ ⎝ ⎜ ⎞ ⎠ ⎟

k−η η

+τ

−k 3a+b

⎛ ⎝ ⎜ ⎜ ⎞ ⎠ ⎟ ⎟ ⎡ ⎣ ⎢ ⎢ ⎢ ⎤ ⎦ ⎥ ⎥ ⎥ ρΛ2 (12b) ∂λx

*

∂b = −λ* σ −1 3η2 f fX ⎛ ⎝ ⎜ ⎞ ⎠ ⎟

1 η

τ

σ −1 η

ln f fX ⎛ ⎝ ⎜ ⎞ ⎠ ⎟ + σ −1

( )lnτ

⎛ ⎝ ⎜ ⎞ ⎠ ⎟ ⎡ ⎣ ⎢ ⎢ ⎤ ⎦ ⎥ ⎥

ρ = f fX ⎛ ⎝ ⎜ ⎞ ⎠ ⎟ 3a + b

( ), Λ = 3 η − k ( )

Comparative Statics

❖ (12a) is dependent on this condition: ❖ The impact of depends on shape of the distribution of

firms, , i.e., market structure

(13a) ∂λ* ∂b < 0 when k < η +γ , and vice versa

γ = − η σ −1 1+ f fX ⎛ ⎝ ⎜ ⎞ ⎠ ⎟

η−k η

τ

−k 3a+b

⎛ ⎝ ⎜ ⎜ ⎞ ⎠ ⎟ ⎟ ln f fX ⎛ ⎝ ⎜ ⎞ ⎠ ⎟ − σ −1

( )lnτ

⎛ ⎝ ⎜ ⎞ ⎠ ⎟ ⎛ ⎝ ⎜ ⎜ ⎞ ⎠ ⎟ ⎟ > 0

k

b

Comparative Statics

Comparative Statics

❖ (12b) is dependent on this condition: ❖ The impact of depends on extent that . If ,

then export rents outweigh fixed costs of exporting given an increased . If , then fixed costs of exporting outweigh export rents, leading to export exit.

(13b) ∂λX

*

∂b < 0 when ln f fX ⎛ ⎝ ⎜ ⎞ ⎠ ⎟ + σ −1

( )lnτ > 0, and vice versa

b

fX > f f → fX fX >> f

b

Data

❖ Source: Chile’s Encuesta Nacional Industrial Anual

(ENIA), an unbalanced panel data set. Industry-level tariff rates from TRAINS database (WITS).

❖ Sample years: 2001-2007. ❖ Sample size: 11,196 observations, approximately 1,600

food-processing firms per year in the sample.

Data

Data

Empirical Specifications

❖ Export Entry: ❖ Market Exit: ❖ Specification forthcoming: depends on how ENIA tracks firm exit ❖ Quality Choice: ❖ Changes in Size:


(14) Pr Exporti,t = 1 Exporti,t−1 = 0

( ) = α + β1 ⋅c + β2 ⋅φ +γ ⋅b +δ ⋅Δτ + µ ⋅λ +κ ⋅ X + ε

(15) q = α + β1 ⋅c + β2 ⋅φ +γ ⋅b +δ ⋅Δτ + µ ⋅λ +κ ⋅ X + ε (16) ΔSize = α + β1 ⋅c + β2 ⋅φ +γ ⋅b +δ ⋅Δτ + µ ⋅λ +κ ⋅ X + ε

Results

Conclusion

❖ Theoretical model adapts heterogenous-firms framework to food industry

context

❖ Firms that remain in the market select higher quality and are larger

given falling trade costs and increased ability to upgrade quality, and use concurrently higher-quality inputs

❖ Trade liberalization forces the least productive firms out of the market

while most productive non-exporters enter the export market

❖ Impact of ability to upgrade quality dependent on the market structure:

distribution of firms in the market and structure of fixed costs matter

❖ Empirical analysis currently provides mixed evidence: results cast doubt

• n quality constraint, but generally support the impact of on firm

characteristics and market structure

b