Price and quality competitiveness across OECD countries: An approach to quality by R&D expenditure

The aim of this paper is to analyse the effects of quality competitiveness based on technological innovation on the bilateral trade of goods. Our approach is based on the estimation of an import demand model that uses the data for 19 manufacturing sectors across 28 OECD countries over the period of 1998-2012. In the first step, to identify quality from prices, the logarithm of unit value (a proxy of price) is regressed on the logarithm of private R&D expenditure (a proxy for quality). The quality-adjusted prices are derived from the difference between the unit value and its predicted value. In the second step, an import demand function is used to distinguish the effects of quality (private R&D expenditure) from the effects of other factors, such as production costs, which are approximated by the quality-adjusted prices. The results of the first step indicate a significant positive effect of quality on the prices of imported goods in 7 out of 19 sectors. The results of the second step emphasise significant nonlinear effects of prices and quality on the import demand of goods: when the quality of imported goods is higher, the marginal effect of an increase in quality on the import demand is greater.