# **1 Introduction**

The quality of internationally traded goods is strongly associated with income per capita: within narrow product categories, richer countries tend to import and export higher quality goods, which tend to carry a higher price (Schott, 2004; Hummels and Klenow, 2005; Hallak, 2006; Hallak and Schott, 2011; Feenstra and Romalis, 2014). While this earlier literature does not establish a causal relationship between product quality and economic performance, more recent evidence based on firm-level data reveals that access to high quality inputs is an important driver of firm upgrading in developing countries (Verhoogen, 2023). For example, Bas and StraussKhan (2015) find that tariff reductions on inputs led non-processing firms in China to increase the prices they paid for inputs and to increase the prices and quality of their outputs.<sup>1</sup> Focusing on Colombia, Fieler, Eslava, and Xu (2018) uncover an amplification effect in firm upgrading: tariff reductions on inputs lead firms to upgrade the quality of outputs, which increases their demand for other high-quality inputs; this gives incentives for local suppliers to upgrade, which in turn gives final-good producers further incentives to upgrade.

Among the set of inputs that matter for productivity growth in developing countries, there is growing evidence that digital goods are critical. Early evidence by Commander, Harrison, and Menezes-Filho (2011) reveals positive effects of information and communication technologies (ICT) in the performance of Brazilian and Indian manufacturing firms, while more recent evidence by Hjort and Poulsen (2019) shows that the arrival of submarine internet cables in Africa raised skilled employment, and led to increased firm entry, productivity, and exporting, thereby lifting average incomes. Using firm-level data for 82 developing countries, Cusolito, Lederman, and Pena (2021) find large positive effects of digital technology adoption on firm productivity.<sup>2</sup> Since digital goods are mainly produced in advanced or large emerging economies such as China, the quality and prices at which firms and consumers in developing countries can acquire them in international markets are especially important. However, there is little systematic evidence on the quality and prices of imported digital goods in low-income countries, or on the degree of tariff protection they face. A recent study using item-level prices from the International

> 1Fan, Li, and Yeaple (2015) also find that Chinese firms responded to reduced tariffs on imported inputs by raising export prices and quality, and that this effect is stronger in more differentiated sectors. Bas and Paunov (2021) find broadly similar results with representative data from Ecuador (linking customs data to a more traditional plant panel survey), and in addition that imported-input driven upgrading is stronger in more skill-intensive firms and is in turn associated with increases in skill intensity.

> 2As summarized in Dutz, Almeida, and Packard (2018), recent related research for Latin America concludes that digital technology adoption offers a pathway to higher productivity. Total factor productivity of technologyadopting firms increased in Argentina, Brazil, Chile, Colombia, and Mexico (Brambilla and Tortarolo, 2018; Iacovone and Pereira-Lopez, 2018; Almeida, Fernandes, and Viollaz, 2017; Dutz, Mation, O’Connell, and Willig, 2017).

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