Technological catching up, quality of exports, and competitiveness: A Sectoral perspective

We analyze the relationship between Central and Eastern European countries (CEEC) industry-level competitiveness and technological catching up induced by economic integration with European Union (EU) economies. A theoretical dynamic setup is developed in which high-skill firms gain market share in "quality dominated" markets, whereas low-skill firms face price competition for their exports. We run econometric estimations for bilateral trade between CEEC and EU economies over 2000-2007. We first test the assumption that the unit value ratio is a good proxy for quality in trade and then use the fitted unit value ratio to estimate the role of preference for quality in CEEC market share changes. Estimations support the results of the theoretical model.