Does input sector liberalization promote quality innovation and exports?

This paper examines the relationship between input sector liberalization and product quality innovation and export orientation by a LDC firm given the complementarity between high input quality and high product quality. We show that input sector liberalization per se may not induce quality innovation and outward orientation. In fact, in some situations, ceteris paribus input sector liberalization may increase the odds in favour of low-quality production. We show that total output sector liberalization, or surprisingly, a suitable degree of output sector protection is needed to be combined with input sector liberalization so that quality innovation is induced.