Quality upgrading and position in global value chain

This paper analyses how the quality of produced goods affects firms' position in global value chains (GVCs). Extending the theoretical framework of Chor et al. (2021), we find that quality upgrading increases the span of production stages performed by the firm: it imports more upstream (less transformed) intermediate products and exports more downstream (more highly processed) products. Expansion along GVCs through quality upgrading is accompanied by an increase in input purchases, assets, value added, and profits. These theoretical predictions are tested using 2004-2017 firm-level data on French agri-food industries (from French customs and the AMADEUS database). In line with recent work, we identify firms that participate in GVCs with those that jointly import and export, and measure firms' position in value chains through the level of transformation (upstreamness) of goods they use and produce. We use several ways to measure product quality at firm level, all inspired by the commonly accepted assumption that, at equal prices, higher quality products are sold in larger quantities. Our findings confirm the prediction that higher-quality firms use more upstream inputs produced by other firms to produce more transformed outputs, and perform a larger span of intermediate production stages in-house. We find limited empirical evidence in support of other predictions.