Why don't firms export more? Product quality and Colombian plants

Exporting firms around the world ship only a small fraction of their output overseas. For firms in a large country, such as the United States, this behavior can be explained by the existence of a large domestic market. For firms in a small lower income country, such as Colombia, the lower share of exports remains a puzzle. This paper begins by illustrating the failure of current models to explain plant export patterns in Colombia. Even models that do well in describing the US export distribution fail when confronted with the Colombian data. In response to this puzzle, this paper suggests that Colombia's export distribution can be explained with a two-dimensional productivity space where output productivity is considered separately from quality productivity. Predictions of this theory are tested on Colombian plant level data from 1981-1991. Overall, product quality is shown to be a significant factor in explaining the tendency for Colombian plants to under-export manufactured goods to the United States. (c) 2005 Elsevier B.V. All rights reserved.