13 Increasing human capital by one standard deviation also accelerates quality convergence by 0.1 percent per year, but only in manufacturing. An increase in FDI inflows of 1 percentage point of GDP is associated with a 0.06 percent per year increase in export quality in the other natural resource sector.<sup>38</sup> This effect can be economically significant in resource-dependent developing countries, where natural-resources FDI is high relative to GDP. In manufacturing, the effect is also statistically significant but economically negligible.

Trade liberalization leads to faster quality upgrading, particularly in agriculture but also in manufacturing, in both the basic and extended specifications. A one standard deviation increase in trade liberalization accelerates quality convergence by 0.2 percent per year in agriculture and 0.1 percent per year in manufacturing. Agricultural liberalization leads to faster agricultural quality upgrading only in the basic specification (a one standard deviation increase boosts quality convergence by 0.1 percent per year).

Fixed effects account for much of the observed sample variation in the pace of quality upgrading. This is challenging to interpret, but suggests that unobservable dimensions of institutional and policy performance may have important implications. Relatedly, a country moving into a new product line should not automatically expect rapid quality growth.

# **C.   Robustness**

We now present two robustness checks. The first varies the time period over which quality growth is calculated. The second includes financial openness variables as additional determinants of quality upgrading.

We start by adopting a single cross section from the beginning to the end of the sample (Table 5, left half). Since this drops the time dimension, only country and product fixed effects can be included. The results are therefore most appropriately compared with the earlier basic specification. These cross-sectional results again highlight the importance of unconditional convergence in quality levels. Initial quality levels are the only determinant that retains statistical significance across all sectors. The speed of convergence toward the world quality frontier is estimated at 5 percent per year; these estimates incorporate the effect of countryproduct specific barriers, which are not separately controlled for. Agricultural liberalization also has an effect on agricultural quality upgrading; the magnitude of the estimates here is twice as large as in the basic specification with 10-year periods.

We also use observations on 5-year non-overlapping periods, rather than the earlier 10-year periods (Table 5, right half). Here, both country-product and product-year fixed effects are included, as in the earlier extended specification. The results broadly confirm those of the extended specification, although with a lower goodness of fit. The main difference is that the speed of unconditional convergence increases to 20– 23 percent per year. This likely reflects the greater potential for measurement error when using short time periods. The magnitudes of the other estimated effects change only slightly, with the statistical significance of the coefficients remaining virtually unchanged from the extended specification. The effects are greater for initial GDP per capita and education, and smaller for trade liberalization, in those sectors where these impacts were previously found to be statistically significant. The effect of institutional quality is greater in agriculture, but lower in manufacturing.

The second robustness check adds to the extended specification two measures of de jure financial openness: a domestic financial liberalization index, and an external capital account openness index, drawn from Prati

> 38 The effects of both human capital and FDI inflows are only observed after country-product heterogeneity is controlled for.

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