Resisting Foreign Competition – A Case Study of France and Germany

This article incorporates both the new trade and the endogenous growth theories to study the determinants of import volumes of France and Germany so as to explain their individual industrial competitiveness strategies – price or quality competition. This article is different because it studies competitiveness of a country’s products by considering its resistance to foreign competition rather than considering exports of these countries. Using disaggregated bilateral data for 16 European countries including Japan and the United States across 15 distinctly classified industries over a period of 20 years (between 1991 and 2010), we use an import demand equation to compare the relative product performances of France and Germany vis-a-vis their exporting competitors. To eliminate the price endogeneity problem, we implement a Two Stage Least Squares (2SLS) estimation technique using the cost of production (which includes the unit labor cost and costs of capital and intermediates), mark-up and distance as instrumental variables for import prices. We also proxy innovation and hence product quality using research and development (R&D) intensity, reported in Product Field. We find that French products are highly substitutable vis-a-vis their foreign competitors in contrast to German products. Germany adopts better quality competitive strategies, thus rendering their products less substitutable and highly differentiated vis-a-vis their foreign counterparts.