Getting Ready: Preparation for Exporting

This study examines developments at the plant-product level preceding an expansion into foreign markets. It relies on very detailed Mexican data for 1994-2004, a period of liberalization in US trade policy vis a vis Mexico, mandated by the North American Free Trade Agreement. Our approach is novel in that we focus on quality, proxied by domestic price premium, of current and future export products. Our findings are consistent with quality upgrading taking place in preparation for entry into export markets. We show that manufacturers who export a particular product variety tend to obtain a price premium for their domestic sales of this variety. Consistently with the hypothesis of quality upgrading before exporting, we find evidence that this premium emerges exactly one year before a variety starts being exported. We find no evidence of upgrading after entering export markets. Our IV estimates suggest that the changes in the price premium are driven by the anticipated cuts in US tariffs and are particularly pronounced among producers exhibiting better performance in the initial period.