Climbing the Rungs of the Quality Ladder: FDI and Domestic Exporters in Romania

This article argues that inflows of foreign direct investment can facilitate export upgrading in host countries. Using customs data merged with firm-level information for 2005–11, it shows a positive relationship between the quality of products exported by Romanian firms and the presence of multinational enterprises (MNEs) in the upstream (input-supplying) industries. Export quality is also positively related to MNE presence in the downstream (input-sourcing) industries and the same industry, but these relationships are less robust. These conclusions hold both when the product quality is proxied with unit values and when it is estimated following the approach of Khandelwal et al. (2013).

WELFARE EFFECTS OF PATENT PROTECTION IN A SEMI-ENDOGENOUS GROWTH MODEL

This paper examines how strengthening patent protection affects welfare in a nonscale quality-ladder model, which was developed by Segerstrom [American Economic Review 88, 1290–1310] and generalized by Li [American Economic Review 93, 1009–1017]. In the Segerstrom–Li model, patent protection creates no distortion in static allocation among the production sectors. In order to examine the welfare effects of strengthening patent protection adequately, we incorporate a competitive outside good into the Segerstrom–Li model. In the general model, we derive the welfare-maximizing degree of patent protection analytically by utilizing a linear approximation of the transition path. The result shows that the welfare-maximizing degree of patent protection is weaker when the market share of the outside good is positive than when it is zero. In other words, disregarding the static distortion that patent protection creates leads to excessive patent protection.

Role of Credit Constraints on Product Quality

We analyze firms' investment on R&D in an imperfectly competitive setting. Our focus is on cost asymmetries in a duopoly model. The baseline model setting assumes firms invest in a quality ladder type of R&D process with probabilistic returns and have to borrow both at the innovation stage and the production stage. We find that if the firm is more efficient than the rival, effort on R&D will decrease less upon facing a common interest rate. We test our theoretical predictions using World Bank's Business Environment and Enterprise Performance Surveys (BEEPS, 2002, 2005) for Turkey.