In principle, firms in developing countries benefit from the fact that advanced technologies and products have already been developed in industrialized countries and can simply be adopted, a process often referred to as industrial upgrading. But for many firms this advantage remains elusive. What is getting in the way? This paper reviews recent firm-level empirical research on the determinants of upgrading in developing countries. The first part focuses on how to define and measure various dimensions of upgrading—learning, quality upgrading, technology adoption, and product innovation. The second part takes stock of recent evidence on the drivers of upgrading, classifying them as output-side drivers, input-side drivers, or drivers of know-how. I conclude with some thoughts about promising directions for research in the area. (JEL D21, D24, D83, F14, L26, O14, O31)

Journal Article Trade, Quality Upgrading, and Wage Inequality in the Mexican Manufacturing Sector Get access Eric A. Verhoogen Eric A. Verhoogen Department of Economics and Department of International and Public Affairs, Columbia University Search for other works by this author on: Oxford Academic Google Scholar The Quarterly Journal of Economics, Volume 123, Issue 2, May 2008, Pages 489–530, https://doi.org/10.1162/qjec.2008.123.2.489 Published: 01 May 2008

Beginning with Wilfred J. Ethier (1979, 1982), an important current of research has emphasized gains to trade from the greater availability of intermediate inputs, as opposed to the greater availability of consumption goods emphasized by Paul R. Krugman (1979) and others. It has been standard in this literature to model input varieties as symmetric, differentiated horizontally but not vertically. In contrast, anecdotal accounts, especially from developing countries, often stress the importance of gaining access to high-quality inputs on the import market. In theoretical discussions, the need to distinguish between the number of inputs and the quality of those inputs can be avoided by treating different qualities of a good as distinct varieties (see, e.g., Paul Romer 1994) or by redefining units of measurement. But in empirical work, one inherits the product categories and units in the data, and typically one must specify whether the availability-of-inputs mechanism is expected to operate through an increase in the number of input categories or through an increase in the quality of inputs within categories. Because of data constraints—in particular because of a lack of information on input and output prices in standard plant-level datasets—it has been difficult to investigate the role of input-quality differences, and recent empirical work, notably by Christian Broda, Joshua Greenfield, and David Weinstein (2006) and Pinelopi K. Goldberg et al. (2008), has tended to focus more on changes in the number of input categories than on quality differences within those categories. In this short paper, we draw on rich product level information from the Colombian manufacturing census to present a new set of facts about importing plants and input prices. The dataset is unique in that it contains detailed, representative, consistently measured information on the unit values of all inputs and outputs of plants. For the 1982–1988 period, the dataset also contains unit values separately for domestic and imported purchases of each input. As we discuss in more detail below, we interpret the new facts as suggesting that Colombian plants purchase higher-quality inputs on the import market than on the domestic market, within narrow product categories. Our empirical work has been guided in part by a theoretical framework from a related paper, Kugler and Verhoogen (2008). In that paper, we hypothesize a complementarity between input quality and plant productivity in generating output quality, and extend the model of Marc J. Melitz (2003) to accommodate it. The model predicts that, in equilibrium, more-productive plants are larger, use higher-quality inputs, produce higher-quality outputs, and are more likely to enter the export market than less-productive plants in the same industry. Using the Colombian plant census, we show that the cross-sectional correlations between a number of observable variables—output prices, input prices, plant size, and export status—as well as differences in those correlations across sectors,—are consistent with our theoretical framework and difficult to reconcile with alternative models that impose symmetry of either inputs or outputs. The distinctive aspect of the current paper is the focus on the distinction between imported and domestic inputs.

Comparing two sources of wage data in Mexico—firms' reports to the social security agency and individuals' responses to a household survey—we document extensive underreporting of wages by formal firms, with compliance better in larger firms. We also present evidence that the 1997 Mexican pension reform, which tied pension benefits more closely to reported wages for younger workers, led to a relative decline in underreporting for younger age groups. The results suggest that giving employees incentives and information to improve the accuracy of employer reports can be an effective way to improve payroll tax compliance.

This short paper examines the effect of exporting on within-plant wage distributions in employer-employee data on Mexican manufacturing plants. Using the late-1994 peso devaluation interacted with initial plant size as a source of exogenous variation in exporting and focusing on wages at the 10th, 25th, 50th, 75th and 90th percentiles within each plant, we document three patterns: (1) there is no evidence of an effect of exporting on wages at the 10th percentile; (2) the wage effects of exporting are larger at higher percentiles, up to the 75th; and (3) there is no evidence of an increase in dispersion within the top quartile.

This paper examines how schools' choices of class size and households' choices of schools affect regression-discontinuity-based estimates of the effect of class size on student outcomes. We build a model in which schools are subject to a class-size cap and an integer constraint on the number of classrooms, and higher-income households sort into higher-quality schools. The key prediction, borne out in data from Chile's liberalized education market, is that schools at the class-size cap adjust prices (or enrollments) to avoid adding an additional classroom, which generates discontinuities in the relationship between enrollment and household characteristics, violating the assumptions underlying regression-discontinuity research designs. (JEL D12, I21, I28, O15)

Abstract This paper draws on employer-employee and longitudinal plant data from Mexico to investigate the impact of exports on wage premiums, defined as wages above what workers would receive elsewhere in the labor market. We decompose plant-level average wages into a component reflecting skill composition and a component reflecting wage premiums. Using the late-1994 peso devaluation interacted with initial export propensity as a source of exogenous changes in exports, we find that exports have a significant positive effect on wage premiums and that the effect on wage premiums accounts for essentially all of the medium-term effect of exporting on plant-average wages.

This paper examines the relationship between the destination of exports and the input prices paid by firms, using detailed customs and firm-product-level data from Portugal. Both ordinary least squares regressions and an instrumental-variable strategy using exchange-rate movements (interacted with indicators for initial exports) as a source of variation in destinations indicate that exporting to richer countries leads firms to pay higher prices for inputs, other things equal. The results are supportive of what we call the income-based quality-choice channel: selling to richer destinations leads firms to raise the average quality of goods they produce and to purchase higher-quality inputs. (JEL D22, D24, F14, F31, L15)

Abstract This article studies technology adoption in a cluster of soccer-ball producers in Sialkot, Pakistan. We invented a new cutting technology that reduces waste of the primary raw material and gave the technology to a random subset of producers. Despite the clear net benefits for nearly all firms, after 15 months take-up remained puzzlingly low. We hypothesize that an important reason for the lack of adoption is a misalignment of incentives within firms: the key employees (cutters and printers) are typically paid piece rates, with no incentive to reduce waste, and the new technology slows them down, at least initially. Fearing reductions in their effective wage, employees resist adoption in various ways, including by misinforming owners about the value of the technology. To investigate this hypothesis, we implemented a second experiment among the firms that originally received the technology: we offered one cutter and one printer per firm a lump-sum payment, approximately a month’s earnings, conditional on demonstrating competence in using the technology in the presence of the owner. This incentive payment, small from the point of view of the firm, had a significant positive effect on adoption. The results suggest that misalignment of incentives within firms is an important barrier to technology adoption in our setting.

Researchers typically invoke theoretical assumptions to estimate mark-ups. Instead, we directly obtain mark-ups by surveying Pakistani soccer-ball producers. We document six facts: (i) Mark-ups are more dispersed than costs; (ii) Mark-ups and costs increase with firm size; (iii) The mark-up elasticity with respect to size exceeds the cost elasticity; (iv) Costs increase with size because larger firms use higher-quality inputs; (v) Larger firms charge higher mark-ups because they have higher production shares of high-quality balls that carry higher mark-ups, and because they charge higher mark-ups conditional on ball type; (vi) Correlations suggest marketing efforts are important for generating higher mark-ups.