Demand, costs and product scope in the export market

In this paper, we distinguish between the contributions of two dimensions of firm heterogeneity, quality and productivity, to the export performance of Taiwanese multiproduct firms. We develop a theoretical model in which the relative importance of these two dimensions of firm heterogeneity depend on the degrees of product differentiation and cost elasticities of quality improvement. Our empirical results confirm the predictions of the theoretical model. Both quality and productivity play important roles in explaining firm export participation and export scope. Quality contributes more to export decisions for firms in more differentiated product markets and products with lower cost elasticities of quality improvements while productivity effects are stronger in markets with low degrees of product differentiation but high cost elasticities of quality improvements.