Exporting doesn’t just expand a company’s reach - it reshapes its behavior. From technology upgrades in Argentina and Canada to higher wages and quality certifications in Mexico, global exposure consistently pushes firms to evolve. Even in Myanmar and Egypt, exporters improve working conditions and enhance product quality.
A study by CATÓLICA-LISBON CUBE researcher Joana Silva, in co-authorship with, Paulo Bastos (World Bank), and Eric Verhoogen (Columbia University), identifies a key mechanism: the income level of a firm’s export destinations. The paper, Export Destinations and Input Prices, explores how exporting to richer countries leads firms to upgrade the quality of goods it produces, and the inputs it uses to make them.
Rich Markets, Higher Standards
In global trade, richer countries tend to demand higher-quality goods. This often means firms must adapt their production processes, adopting new technologies, hiring more skilled labor, or purchasing higher-quality materials.
This study focuses on a key idea: the income-based quality-choice channel. The richer the customer, the higher the quality demanded. The higher the quality demanded, the more firms must invest—upstream and downstream—in delivering it.
The challenge in tracing the relationship between the destination of exports income and the input prices paid by firms lies in measurement and causality. Most data collected at the firm level doesn’t show the quality of the outputs exported and link it to the quality of the inputs used for their production, which makes it hard to understand the different factors driving trade and the various channels that drive quality upgrading. Additionally, researchers can’t directly observe product quality in most trade data. Instead, they have typically inferred quality through prices, under the assumption that higher prices often signal higher quality.
However, export prices can be misleading. First, firms may charge higher markups in richer countries, even for homogeneous goods. Previous research by Bastos and Silva showed that Portuguese firms tend to charge higher prices for the same types of products when selling to wealthier countries, even after accounting for factors like distance and other market characteristics. Second, even if export prices did reflect product quality, internal changes within firms (like shifts in product strategy or market access) could affect both which products a firm chooses to sell and where it is able to sell, creating a false link between product quality and the income level of the destination country.
A New Approach: Input Prices
Joana Silva and colleagues propose an innovative perspective linking the quality of outputs to that of inputs. While firms might adjust the prices they charge depending on the market, the prices they pay for inputs, the raw materials, components, and services they purchase, are less likely to be distorted by such strategies and, in both cases, exchange-rate shifts are out of the firm control. Unit values of the inputs purchased offer a cleaner window into quality decisions. Using detailed data from Portuguese firms, including customs records and firm-product transactions and production information, the researchers tracked how firms adjusted their behavior when exchange rates shifted sales toward wealthier destinations.
The result? A clear pattern: when exchange-rate changes shift sales toward wealthier countries, firms respond by upgrading both their products and the inputs used to make them. The logic is straightforward: richer markets demand higher quality, and more productive firms are positioned to meet that demand. Results are supportive of 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.
This holds true even after accounting for other factors like how far their customers are, how dependent the firm is on exports, or how large the firm is overall. Statistical tests confirm the robustness of the result, reinforcing a compelling narrative: firms that target richer markets adapt by upgrading their inputs, suggesting they’re intentionally producing higher-quality goods for these consumers.
Moreover, this pattern is driven more by increased sales to existing rich-country customers (the intensive margin) than by breaking into new markets (the extensive margin). This nuance highlights that the deeper the relationship with demanding customers, the more pressure, and incentive, there is to improve.
Implications for Emerging Markets
For managers and policymakers in emerging markets, this insight has profound implications:
- Exporting isn’t just a growth strategy—it’s a development strategy. Targeting high-income countries can drive firm-level improvements that ripple across supply chains.
- Quality upgrades begin upstream. Leaders should pay attention to procurement practices and supplier capabilities, not just output quality.
- Deeper relationships drive deeper change. Long-term engagement with demanding markets yields stronger internal improvements than occasional sales.
Although the study focuses on Portugal, the findings have broader implications. As firms in middle-income economies seek to move up the value chain, exporting to richer countries may act as a catalyst for upgrading not just among individual exporters, but across entire supplier networks.
This mechanism helps explain broader patterns observed in global trade, such as the productivity boost that firms often experience when they begin exporting. It’s not just about reaching more customers; it’s about serving more demanding customers. And meeting those demands require firms to rethink and raise the quality of their entire value chain.
This research adds a critical piece to our understanding of global trade. It highlights how income-based quality choices don’t just shape what firms sell—but how they invest, improve, and compete.
To grow globally, firms must grow internally. And that growth begins not at the point of sale, but at the point of input.
For this important contribution, the paper was published in the American Economic Review, one of the most prestigious and influential academic journals in economics worldwide—part of what economists refer to as the “top five” journals in the field. This is a rare distinction: only two papers using data from Portugal have ever appeared in this prestigious publication. The paper also received the award for "Best Research in the Area of Competitiveness and Globalization Using Data from Portugal," presented by PricewaterhouseCoopers (PwC) and the Portuguese Ministry of the Economy.
You can read more about Silva’ s work in the American Economic Review article “Export Destinations and Input Prices”. See also: VoxDev column and World Bank Research Digest summary (p. 4) for non-technical summaries.