Emerging Markets Finance & Trade, 55:1326–1342, 2019

Copyright © Taylor & Francis Group, LLC

ISSN: 1540-496X print/1558-0938 online
DOI: https://doi.org/10.1080/1540496X.2018.1507905

Quality Competition Versus Price Competition: Why Does

China Dominate the Global Solar Photo-Voltaic Market?
Lili Wang1, Rui Zhuang1, Shunwu Huang2, and Yong Zhao3
1
Institute of International Economy, University of International Business and Economics, Beijing, P. R.
China; 2School of Economics, Hefei University of Technology, Hefei, P. R. China; 3School of
Economics, Renmin University of China, Beijing, P. R. China

ABSTRACT: Using highly disaggregated firm-level data that cover 2,006 firms and 140 destinations over
the period 2000–2013, this article empirically investigates the export pricing decisions and the competi-
tion patterns of China’s solar photo-voltaic (PV) firms when there is selection into exporting. We find that
ignoring the market-selection issue could lead to severe estimation bias if selection into exporting is
correlated with pricing behavior. After controlling for selection bias, the results reveal that country
characteristics and firm heterogeneity are important not only in explaining the vast differences in export
prices but also in affecting how exporters compete in the global market. More productive firms and firms
exporting to larger markets tend to compete in quality, whereas firms with better financial conditions are
more likely to engage in price competition.
KEY WORDS: China, export price, firm-level data, price competition versus quality competition, solar
products

China’s solar PV industry has experienced a remarkable period of rapid growth in recent decades. In
2008, China became the largest PV producer and exporter, with exports reaching 11.7 billion US
dollars, approximately 69 times higher than that in 2001. While the onset of the global financial crisis
retarded the development of the Chinese PV industry, China still dominates the global solar PV
market. As of 2016, China installed 34.5 GW of new solar PV and exported 16.7 billion US dollars of
PV products, accounting for a global market share of 45% and 34%, respectively.1
Many researchers have directed their attention toward investigating the driving forces behind
China’s PV industry. Several factors have been found to be important in explaining the unprecedented
growth of the PV industry. These include consistent and multidimensional policy support, research and
development (R&D), technological learning, factor endowment advantage in labor force and raw
material as well as reduction of external trade barriers (de la Tour, Glachant, and Ménière 2011;
Goodrich et al. 2013; Grau, Huo, and Neuhoff 2012; Groba and Cao 2015; Liu and Goldstein 2013;
Zhao, Wang, and Yu 2016). While the determinants of China’s installed PV capacity and export value
have been well documented at an aggregate level, the behaviors of PV firms at the micro level have
not been explored, to the best of our knowledge.
This article uses highly disaggregated firm-level data to investigate a relatively unexplored dimen-
sion of export pricing behavior. Examining firm-level export pricing has implications for more clearly
understanding the sources of competitiveness of China’s solar PV industry, which is a serious concern
for policy makers and firm owners. We aim to answer the following questions: (1) Are there any
differences in export prices of solar products across firms and destinations? If yes, what factors
contribute the differences? (2) How does China acquire and maintain the largest share of the global
solar PV market? More specifically, does its competitiveness stem from price competition or quality
competition?

Address correspondence to Yong Zhao, School of Economics, Renmin University of China, Beijing 100872,
P. R. China. E-mail: joyong@ruc.edu.cn
Color versions of one or more of the figures in the article can be found online at www.tandfonline.com/mree.
 QUALITY COMPETITION VERSUS PRICE COMPETITION 1327

Recent studies have established that export prices differ systematically across exporting firms
and destinations, even within narrowly defined product categories (Harrigan, Ma, and Shlychkov
2015; Manova and Zhang 2012; Martin 2012). This also holds true for solar PV products. For
instance, the average price of China’s solar panel (Harmonized System code 85,414,020) exported
to the United States was 42% higher than the price of the solar panel exported to Canada in 2013.2
This systematic price dispersion reflects the difference in the quality and feature of an exported
product, which could further serve to discriminate how China’s solar exporters position their products
competitively in the international market. The competitiveness of China’s solar product depends upon
nothing but price or quality; when China dominates the global solar market, it must charge relatively
low price or provide high-quality product.
The nature of China’s competitiveness prevailing in the international solar trade (price competition
versus quality competition) could be distinguished by examining the sign of the correlation between
export price and some firm or destination characteristic variables, such as distance, market size, firm
productivity, and financial conditions. In the workhorse model of heterogeneous firms, Melitz (2003)
predicts that only firms with productivity above a certain threshold level can export. Firms with higher
productivity have lower marginal costs, are able to charge lower prices, and earn higher revenues. This
price competition model thus predicts that the cheapest products are the most competitive. Some later
studies (Baldwin and Harrigan 2011; Crozet, Hatte, and Zignago 2013; Verhoogen 2008) further turn
the standard heterogeneous firms trade model into the quality competition model by incorporating
quality differentiation across products. In these models, competitiveness depends upon the quality-
adjusted price, and the association between observed price and competitiveness is reversed. Firms that
are more competitive will make use of better-quality, more expensive inputs and therefore face higher
marginal costs and prices. These clearly opposed implications regarding the relationship between
competitiveness and export price provide the foundation to distinguish between price and quality
competition. For example, several studies have investigated how exporters compete in the international
market by estimating the price-distance relationship (Baldwin and Ito 2011; Crozet, Hatte, and
Zignago 2013; Rollo 2012). They argue that, as trade costs rise with bilateral distance, products
with the lowest price could be exported to the most distant destinations when price competition
dominates, leading to a negative relationship between export price and distance. Inversely, if quality
competition prevails, export price should increase with the distance of the destination market.
Using the Heckman two-stage estimates, this article empirically investigates export price variations
and competition patterns for solar PV products across firms and destinations when there is selection
into exporting. We find that there are substantial differences in export prices across firms and
destinations, even within PV products narrowly defined at the 8-digit Harmonized System (HS)
level. These vast price differences could be attributed to country and firm heterogeneity. After
controlling for selection bias, we find that although export prices fall systematically with firm age,
they respond positively to the importer’s income, electricity generation from solar sources, implemen-
tation of solar policy, firm size, capital intensity, and their status as a state-owned enterprise (SOE).
Furthermore, more importantly, we find that more productive firms and firms exporting to larger
markets tend to compete in quality, while firms with better financial conditions are more likely to
compete in price.
Our study contributes to three strands in previous research. First, our study relates to the
literature that investigates the determinants of solar industry development and cross-border
“green” trade (i.e., trade for renewable energy and other environmentally friendly products).
Several studies have quantified the determining factors of total export of “green” products. They
find that trade liberalization, foreign direct investment, government policy, and other traditional
gravity variables are important in fostering trade in clean products (Algieri, Aquino, and Succurro
2011; Costantini and Mazzanti 2012; Groba and Cao 2015; Sawhney and Kahn 2012; Zhao, Wang,
and Yu 2016). Previous studies also focus on the pricing decisions of solar products. Gillingham
et al. (2014) investigate the determinants of the prices of solar PV systems in the United States.
They find considerable price dispersions of solar PV systems, both across locations and within a
1328 L. WANG ET AL.

given location. Such dispersions arise from differences in government policies, market structure,
and firm-specific characteristics. Kimura and Zissler (2016) compare the prices of solar PV systems
in Japan with those in Germany and find that prices were almost two times higher in Japan than in
Germany in 2014. They argue that module costs and construction costs contribute to the price
differences. Seel, Barbose, and Wiser (2014) follow a similar approach to price differences in
residential PV systems in the United States and Germany. They find that average residential PV
system prices in Germany are roughly half of those in the United States and that this price
discrepancy stems primarily from differences in soft costs. The majority of these studies mainly
rely on country-level data; empirical studies at the firm level and even the product level remain
scarce. This article attempts to fill this gap in the literature by empirically investigating export
pricing behaviors of Chinese solar exporters at a firm level. Our dataset covers 140 of China’s
export markets and 2,006 solar PV exporting firms for the period 2000–2013.
Second, our study also contributes to the literature on examining whether the pricing behaviors of
exporting firms correspond to price or quality competition models. In a pioneering work, Baldwin and
Ito (2011) attempt to classify the disaggregated export products as facing either price competition or
quality competition. They find that a high proportion of products could be classified as quality-
competition goods for the major EU countries, and the lower proportion is for Canada, Australia, and
China. Crozet, Hatte, and Zignago (2013) follow up on the study of Baldwin and Ito (2011) by
estimating the impact of market accessibility on export price. They find that price competition
dominates in countries specialized in high-quality goods, while quality competition is more important
when specialization is in low-quality goods. Rollo (2012) and Manova and Zhang (2012) also discuss
the implications of their empirical findings in light of the predictions of price and quality competition
models. Both of them find evidence favoring quality competition models. Most of the existing studies
distinguish between price and quality competition by estimating the relationship between price and
country characteristic variable, shedding no light on the impact of firm characteristic. However, recent
studies have confirmed that some firm characteristics, such as firm productivity and financial con-
straint, are important in affecting the competition pattern (Baldwin and Harrigan 2011; Fan, Lai, and Li
2015; Verhoogen 2008). In addition, some country characteristic variable such as distance is time
invariant. Its inclusion in the regression model excludes the possibility of controlling for the unob-
served time-invariant destination fixed effects, which could bias the estimator. Therefore, our study
builds on the literature by estimating the relationship between price and several time-variant country
and firm characteristic variables.
Third, our study is part of a larger agenda to examine export price variations across firms and
destinations. Starting with Schott (2004), several studies have provided empirical explanations for the
vast export price differences, including Harrigan, Ma, and Shlychkov (2015) using US data, Martin
(2012) using French data, Bastos and Silva (2010) using Portuguese data, and Manova and Zhang
(2012) and Ge, Lai, and Zhu (2015) using Chinese data. Our study is closer to those of Manova and
Zhang (2012) and Ge, Lai, and Zhu (2015), both of which also investigate Chinese export price
dispersion at the firm level. However, Ge, Lai, and Zhu (2015) focus on multinational price premiums
for general products, and Manova and Zhang (2012) mainly examine the relationship between export
price, country characteristics, and firm revenue, offering little evidence for many other firm-level
determinants, while our analysis focuses on both country- and firm-level factors affecting export prices
of particular PV products. More importantly, given that firms are heterogeneous and not all select into
exporting, a firm’s pricing decision can only be observed when it starts to sell in a destination market.
This leads to the conclusion that selection into exporting is correlated with pricing strategy. Estimates
that do not take selection into account, therefore, suffer from a selection bias. However, the selection
bias is not accounted for in many existing export price studies. In this article, we further build on
Manova and Zhang (2012) and Ge, Lai, and Zhu (2015) by concentrating our attention on the
quantitative importance of market selection in shaping pricing behavior.
The remainder of the article is structured as follows. The stylized facts section presents a set of
stylized facts regarding China’s exports of solar PV products. The methodology and data section
 QUALITY COMPETITION VERSUS PRICE COMPETITION 1329

describes the data and methodology used to investigate the pricing behavior of Chinese solar PV
exporting firms. The results and discussions section presents and discusses the empirical findings. The
final section concludes.

Stylized Facts
Historical Trends
Figure 1 shows the evolution of China's PV exports. China’s exports of solar PV products grew only
marginally before China’s accession to the World Trade Organization (WTO) in 2001, but it has
increased sharply since then. In the span of the period from China’s WTO entry to the onset of the
global financial crisis, China’s PV exports have increased from merely 167.8 million US dollars to 11.7
billion US dollars—a multiple of 70. In 2008, China surpassed Japan and became the largest PV
exporter, accounting for roughly 27% of the total world PV exports. The onset of the global financial
crisis slowed the pace of China’s PV exports. Solar PV exports in 2009 contracted nearly 10%, making
China’s first-ever decline. To deal with the economic recession, the Chinese government launched a
more active set of policies and identified the solar industry as a strategic industry in that year. Solar PV
exports from China soared again. Exports in 2010 increased 135% over 2009. However, the massive
exports of China’s PV products led to increasing trade disputes between China and other countries.
Large punitive tariffs have been imposed on Chinese solar products since 2012. This, together with
sluggish world demand, cooled China’s solar export boom, leading to the fact that the growth rates of
solar exports in the period 2012–2016 were not comparable with past growth rates. Nevertheless,
China is still by far the world’s biggest exporter of solar products. As of 2016, China exported 16.7
billion US dollars of PV products, representing 34% of the world’s total exports.

Price Variation Across Firms and Destinations

There is substantial dispersion in export prices across firms and destinations. Table 1 presents the
variation in export prices of three solar PV products defined at the 8-digit HS level in 2013. As
Harrigan, Ma, and Shlychkov (2015) suggest, price variation could be comparable across products
when product means are removed. We first remove firm-product means from log export prices; thus,
the across-export-markets component is the main contributor to the differences in export prices. The
average standard deviation of log prices for the average firm-product pair is 1.03, suggesting large
price dispersions across destinations. Next, we remove destination-product means from log export

Table 1. The variation in export prices across firms and destinations.

St. dev. of prices across destinations within St. dev. of prices across firms within
firm-product pairs destination-product pairs

Mean 1.03 1.87

St. dev. 0.92 0.98
Min 0 0
10th Percentile 0.11 0.64
90th Percentile 2.17 2.96
Max 9.58 8.18
Observations 2279 404

Note: This table summarizes export price dispersion across 4,787 firms, 200 destination markets, and three solar PV
products (HS codes: 85,414,010, 85,414,020, and 85,414,090) in 2013. Source: the Chinese customs database.
1330 L. WANG ET AL.

prices so that firm heterogeneity only explains price variation. The resulting average standard devia-
tion of log prices for the average destination-product pair rises to 1.87, highlighting much more
variation in export prices than what we find when firm-product means are removed. As a simple
statistical result, firm heterogeneity seems to be more important than country characteristics in
explaining the overall differences in export prices.

Limited Selection into Exporting

Figure 2 shows the histogram of the number of destinations reached by Chinese PV exporting firms. It
can be seen that a larger proportion of observations cluster at the very low end of the distribution. In
fact, Chinese PV firms exported on average to 3.14 foreign destinations in the whole sample period.
Firms that served only one or two markets were nearly 74% of total PV exporters, while firms
exporting to more than 10 destinations accounted for a very small fraction of being 5.5%. Because
of this, 98% of selections into exporting in firm-destination pairs have been not realized.3 Moreover,

Figure 1. China’s PV exports (left axis, US dollars) and corresponding share (right axis).
Source: Data are obtained from the UN Comtrade database.

90 %
80
70
60
Frequency

50
40
30
20
10
0
0 10 20 30 40 50 60 70 80 90 100 110 120

Figure 2. Histogram of the number of destinations.

Source: the Chinese customs database.
 QUALITY COMPETITION VERSUS PRICE COMPETITION 1331

PV firms tend to place different weights on export markets. Penetrations of destinations were mainly
concentrated around American, European, and Asian countries. Specifically, more than 1,500 firms
had export records to the United States, Germany, India, Japan, and Korea, and the United States
ranked first in preference among destinations for Chinese PV exporters, with a selection amount of
2,953 firms. In contrast, fewer than five Chinese PV firms chose some small countries, especially the
least developed economies in African regions, such as Eritrea and Comoros.

Methodology and Data

Methodology
In this section, we turn to examine export pricing decisions of solar PV firms. Our baseline regression
model is specified as follows:

lnpijt ¼ a þ Xijt β þ ui þ vj þ ωt þ εijt (1)

lnp is the log price charged by firm i in market j at year t. X denotes the vector of the firm and country
characteristic variables that might explain the differences in export prices across firms and destina-
tions. β is the vector of the parameters of the characteristic variables, which measures the magnitude of
the impacts on export price and could be used to infer how solar PV exporters compete in the
international market. ui and vj are province and country fixed effects, respectively, used to capture
time-invariant location-specific and destination-specific heterogeneity; ωt is a time-fixed effect used to
capture time-variant shocks; and εijt is random error.
While an unbiased estimator of β has the interpretation of impacts of firm and country character-
istics on export prices, the implications of β in pricing equation (1) are complicated. The key issue is
that firms’ pricing decisions are only observed when they select into exporting (Harrigan, Ma, and
Shlychkov 2015; Mallick and Marques 2017). If the variables affecting export prices also determine
the destination-entry decisions, β will conflate the effects of both export pricing and destination
selection. Econometrically, the errors of the price equation will correlate with the errors of the selection
equation, biasing the benchmark results. To address for this selection bias, we employ a Heckman
(1976) procedure and first estimate the following selection equation.


Pr Yijt ¼ 1 ¼ a þ Zijt δ þ ui þ vj þ ωt þ νijt (2)

where Pr is the probability of entering a foreign market, while Y is a latent variable that takes a
value of 1 if a firm selects to exporting and takes 0 otherwise. Equation (2) is estimated using a
Probit technique. Then, we calculate the inverse Mills ratio λijt and add it as an additional
regressor in the baseline price equation (1). The baseline regression model is therefore revised
as follows:

lnpijt ¼ a þ Xijt β þ θλijt þ ui þ vj þ ωt þ εijt (3)

After controlling for selection bias, equation (3) produces consistent and efficient estimates.

Data and Measurement

We first construct export price based on data from the 2000–2013 Chinese customs database. This
database is conducted by China’s General Administration of Customs and contains detailed informa-
tion on each trade transaction, including trade value, quantities, products, destination countries, and
custom regimes. We measure export price as the ratio of export value over physical quantity, which are
F.O.B. price in US dollars.
1332 L. WANG ET AL.

While the Chinese customs database provides information for more than 495,000 firms, 200 countries
and 7,000 products at the 8-digit HS level, we focus on the firms that have export records of solar PV
products at least once in the sample. Several studies have pointed out that, though HS subheading 854,140
(Photosensitive semiconductor devices, Photovoltaic cells and light-emitting diodes) also includes unre-
lated products, it is the most accurate approximation of the product group of solar PV goods (Algieri,
Aquino, and Succurro 2011; Jha 2009; Jordan-Korte 2011). In the case of China, the commodity class
854,140 comprises only one 8-digit HS product, 85,414,000, before 2009. Since then, the trade code
85,414,000 has been further decomposed into three different new HS codes: 85,414,010 (light-emitting
diodes), 85,414,020 (solar cells), and 85,414,090 (other photosensitive semiconductor devices). The
commodity class 85,414,010 includes most of unrelated solar products, but it only accounts for a small
share of total exports of the 6-digit product class 854,140. As of 2009, China exported 1.2 billion US
dollars of product class 85,414,010, representing only 10.8% of total exports of the class 854,140.4
Therefore, to make a consistent analysis, we aggregate the customs data to the HS 6-digit level and use
the commodity class 854,140 to capture export pricing behaviors of solar PV-related goods. The inclusion
of unrelated solar products should not bias our results too much. In the robustness check part, we further
check the robustness of our findings by excluding unrelated solar products.
The variables to be included in X are at both country and firm level. We are particularly interested in the
signs of the coefficients of three core variables, which should tell us whether price or quality competition
explains most relative trade performances. They are: (1) GDP, measured as the GDP of an export market in
current US dollars and used to control for foreign market size. Melitz and Ottaviano (2008) argue that
larger markets breed higher levels of competition, which would exert downward pressure on markups and
therefore export prices. However, Manova and Zhang (2012) provide evidence that exporters also might
respond to market competition by increasing product quality, which enables them to set higher prices in
larger countries. Therefore, a negative coefficient of GDP indicates that price competition prevails, while
the opposite holds when quality competition dominates; (2) total factor productivity (TFP), which is
estimated using the augmented Olley and Pakes (1996) methodology. While firms with higher productivity
are able to set prices lower by having lower marginal costs (Melitz 2003), they can also charge higher prices
via exporting higher-quality products (Baldwin and Harrigan 2011; Fan, Lai, and Li 2015; Verhoogen
2008). The relationship between firm productivity and export price depends on which effect dominates.
When quality competition effect dominates, the coefficient of productivity should be positive; firms with
higher productivity tend to compete by exporting high-quality products; (3) Financial constraint: recent
studies have presented evidences that financial constraints play a crucial role in affecting export pricing
decisions (Fan, Lai, and Li 2015; Secchi, Tamagni, and Tomasi 2016). On one hand, binding financial
constraints increase external finance costs, tending to increase export prices. On the other hand, tighter
financial constraints lead firms to produce lower-quality products, which in turn reduces export prices. In
this sense, the relationship between export price and financial constraint could also serve to discriminate
between price and quality competition. In this article, we follow Manova, Wei, and Zhang (2015) and
Berman and Hericourt (2010) and measure financial constraints by a firm’s tangible assets as a share of
total assets. Higher asset tangibility corresponds to less stringent financial constraints.
The other control variables include: (1) PGDP: measured as GDP per capita and used to capture the
role of income in affecting export prices. Evidence suggests that consumers in rich countries demand
higher-quality products (Fajgelbaum, Grossman, and Helpman 2011; Verhoogen 2008), which would
generate a positive relationship between income and export price; (2) Solar capacity: measured by net
electricity generation from solar sources in the export market. It is possible that a larger share of solar
generation implies a stronger capacity of domestic solar suppliers and, hence, less incentive to import
solar products, which further depresses import prices, yet it is also possible that the development of
domestic solar industry induces a stronger demand for imported solar equipments and modules,
pushing up import prices; (3) Solar policy: the introduction of solar policies in importing countries
reflects the demand preference for solar products, and the export values and prices of solar products to
those countries are expected to be higher (Groba and Cao 2015; Zhao, Wang, and Yu 2016). To
construct the solar policy variables, dummy variables are created to record whether these policy
 QUALITY COMPETITION VERSUS PRICE COMPETITION 1333

instruments are implemented or not. A dummy variable takes the value of zero prior to the imple-
mentation of the policy at a given year and one thereafter; (4) Solar tariff: measured by the most
favored nation (MFN) tariffs imposed on solar imports. As a commonly used measure of the level of
trade barriers (Buono and Lalanne 2012; Bustos 2011), tariff changes could be completely/incomple-
tely passed through into export prices; (5) Firm size: Larger firms tend to have greater market power,
which allows them to increase their markups and thus charge higher export prices. Number of
employees, sales volume, and total assets are commonly used proxies for firm size. As we already
include export volume as excluded variable in the selection equation, and K/L variable in the price
equation, we measure firm size by firm’s total assets to avoid potential multicollinearity between sales
volume and total exports and that between number of employees and K/L. (6) K/L: measured as the
ratio of a firm’s capital stock to number of employees. This variable captures the effect of a firm’s
production technique or factor structure on export prices; (7) Age: measured by the difference between
the survey year and the foundation year and used to capture the role of technology vintage in pricing
strategies between new and old firms; (8) SOE: a dummy variable that takes the value of 1 if a firm is
identified as SOE and 0 otherwise. Recent evidence suggests that SOEs charge higher prices for
general export products (Fan, Lai, and Li 2015); we investigate whether this holds true for solar PV
goods.
Z comprises all the variables included in X and an additional excluded variable, which is expected to be
correlated with market entry but not with export price. We choose total export values of a certain firm as the
excluded variable. Several studies argue that past export experience could facilitate new-market entry by
lowering sunk costs of exporting, building market networks, and reducing market uncertainties (Albornoz
et al. 2012; Defever, Heid, and Larch 2015; Molina 2010; Nguyen 2012). Total export values reflect the
accumulated export experience, which might correlate with the sunk cost of exporting and hence market
selection, but not necessarily with export prices after controlling for other variables.
GDP and GDP per capita data for our sample years are obtained from the World Bank’s World
Development Indicators (WDI) database, while firm-level variables are constructed based on data from
the annual surveys of Chinese manufacturing firms. This industry survey database is collected by the
National Bureau of Statistics of China (NBSC) and covers all SOEs and non-state-owned enterprises
with annual sales of at least five million RMB, providing detailed information on China’s manufactur-
ing enterprises, such as gross output, value added, employment, capital stock, ownership structure,
and comprehensive financial and accounting records. Finally, our dataset covers 2,006 solar PV firms
and 140 export destinations for the 14-year period of 2000–2013.

Results and Discussion

Baseline Results
Table 2 presents the estimation outcomes for price equation (1). Column 1 shows results for the full
sample, while Columns 2 and 3 give estimates for countries with GDP per capita above and below the
sample mean, respectively. Year, destination, and location fixed effects are controlled for in all
columns to address the potential endogeneity issue due to omitted variables. Moreover, given that
regressing individual variables on aggregate variables could induce a downward bias in the estimation
of standard errors (Moulton 1990), we cluster all regressions at the destination level.
We start with the full sample estimates. The coefficients of GDP and financial constraints are significant
and negative, while the coefficients of TFP are significant and positive, indicating that firms with higher
productivity tend to compete in quality, while financial slack firms and firms exporting to larger markets tend
to compete in price. Furthermore, we find that the coefficients of PGDP, solar capacity, solar policy, solar tariff,
firm size, productivity, capital-intensity, and state ownership are significantly positive, and the coefficients of
firm age are significantly negative. These results show that firms that are larger, more capital intensive, and
owned by the state charge higher export prices, whereas older firms and firms exporting to markets that are
poor, less reliant upon solar energy, less policy supported, and more opened charge lower prices.
1334 L. WANG ET AL.

Table 2. Baseline regression results.

(1) (2) (3)

All countries Rich countries Poor countries

Core variable GDP −0.216*** −0.256*** −0.108

(0.0677) (0.0403) (0.0762)
TFP 0.451*** 0.512*** 0.310***
(0.101) (0.109) (0.102)
Financial constraint −0.267*** −0.383*** −0.116
(0.0564) (0.0780) (0.0946)
Control variable PGDP 0.854*** 0.642*** −0.776***
(0.0448) (0.113) (0.227)
Solar capacity 0.0830* 0.0895*** −0.00434
(0.0422) (0.0308) (0.0260)
Solar policy 0.310** 0.507*** −0.135
(0.124) (0.179) (0.210)
Solar tariff 4.876** 9.193 5.824**
(2.024) (8.086) (2.251)
Firm size 0.0575* 0.0151 0.131***
(0.0293) (0.0476) (0.0439)
K/L 0.0844** 0.150** −0.0350
(0.0344) (0.0540) (0.0363)
Age −0.0953*** −0.104*** −0.0796***
(0.00810) (0.00691) (0.0113)
SOE 1.269*** 1.234*** 1.393***
(0.132) (0.0981) (0.358)
Year FE Yes Yes Yes
Country FE Yes Yes Yes
Province FE Yes Yes Yes
R2 0.366 0.342 0.411
Observations 19,314 12,426 6,888

Notes: Standard errors clustered at the destination level are reported in parentheses. ***p < 0.01, **p < 0.05, *p < 0.1.

Next, we turn to the estimates for different income samples. Columns 2 and 3 are suggestive of
the substantial differences in export pricing strategies between rich and poor importers. In the rich
importer sample, export prices react positively to productivity, the importer’s income, solar
capacity, solar policy, capital intensity, financial constraint, and state ownership, and they fall
with market size and firm age, implying similar competition and pricing strategies to the full
sample countries. However, for the poor importers, export prices increase with productivity, firm
size, solar tariff and being state owned and vary negatively with the importer’s income and firm
age without responding to market size, financial constraint, solar capacity, solar policy, and capital
intensity.

Selection Issues
As we discussed concerning methodology, firms’ export prices cannot be observed when firms do
not select into exporting, which could lend a selection bias to baseline estimates. In fact, this
selection bias does not happen by chance, since there are large numbers of zeros or missing export
values in the Chinese customs database. For instance, 4,787 firms have PV export records to 200
 QUALITY COMPETITION VERSUS PRICE COMPETITION 1335

destinations in 2013. However, export prices are only observed for 15,930 firm-destination pairs,
accounting for 1.7% of total potential firm-destination pairs. To address for this selection bias, we
follow the Heckman (1976) procedure and first estimate the selection equation (2) to investigate
the probability of entry at the firm-destination level and then estimate price equation (3) by adding
the calculated inverse Mills ratio. Column 1 in Table 3 presents the results of the selection
equation, while Columns 2–4 report the results of the price equation (3) for different groups of
countries.
Starting with the selection equation, we find that most of the variables bear expected signs.
Specifically, in general, it is difficult for firms to penetrate smaller, richer, much-protected, and less
developed solar markets, while larger, capital-intensive, younger, and SOE firms are more likely to
become solar exporters. Furthermore, the coefficient of firm productivity is significant and negative,
indicating that Chinese solar exporters are less productive than non-exporters. This finding is con-
sistent with the productivity puzzle of Chinese exporters, which has been explained by a number of
studies (Dai, Maitra, and Yu 2016; Lu 2010; Yang and He 2014).

Table 3. Regression results with selection correction.

(1) (2) (3) (4)

Selection equation All countries Rich countries Poor countries

Core variable GDP 0.238*** 0.710*** 0.697*** 0.880***

(0.00563) (0.149) (0.167) (0.240)
TFP −0.0216*** 0.407*** 0.465*** 0.273***
(0.00395) (0.0956) (0.111) (0.0958)
Financial constraint 0.0108 −0.203*** −0.316*** −0.0440
(0.00805) (0.0557) (0.0773) (0.0956)
Control variable PGDP −0.0476*** 0.722*** 0.481*** −1.009***
(0.0114) (0.0555) (0.117) (0.266)
Solar capacity 0.0175*** 0.154*** 0.158*** 0.0729**
(0.00143) (0.0401) (0.0236) (0.0316)
Solar policy 0.0112 0.372*** 0.570*** −0.0569
(0.0102) (0.122) (0.174) (0.213)
Solar tariff −0.757** 1.889 5.828 2.760
(0.302) (2.191) (9.815) (2.471)
Firm size 0.0425*** 0.265*** 0.224*** 0.347***
(0.00291) (0.0225) (0.0332) (0.0408)
K/L 0.0634*** 0.320*** 0.389*** 0.209**
(0.00314) (0.0626) (0.0886) (0.0903)
Age −0.0207*** −0.181*** −0.191*** −0.167***
(0.000647) (0.0129) (0.0138) (0.0244)
SOE 0.0877*** 1.642*** 1.633*** 1.735***
(0.0160) (0.143) (0.0773) (0.407)
Excluded variable 0.0123***
(0.000902)
Selection control 4.554*** 4.668*** 4.613***
(0.587) (0.706) (1.068)
Year FE Yes Yes Yes Yes
Country FE Yes Yes Yes Yes
Province FE Yes Yes Yes Yes
R2 0.367 0.344 0.410
Observations 1,206,138 18,466 11,903 6,563

Notes: Standard errors clustered at the destination level are reported in parentheses. ***p < 0.01, **p < 0.05, *p < 0.1.
1336 L. WANG ET AL.

In all cases of price equations, the coefficients of the inverse Mills ratios are statistically significant
at the 1% level. This result provides evidences of the presence of a significant correlation between the
errors of the price equation and those of the selection equation, suggesting that the benchmark results
are biased in the absence of selection control.
In the full sample cases, the coefficients of GDP change signs between the benchmark and the
Heckman two-stage estimates. The Heckman two-stage estimations, which are not biased by control-
ling for selection issues, confirm the positive relationship between market size and export price. This is
consistent with the finding of Manova and Zhang (2012). They argue that exporting firms adjust not
only markups but also export quality when facing tougher market competition. If the quality adjust-
ment effects dominate, firms could charge higher prices in larger markets. Furthermore, the coeffi-
cients of firm productivity are significantly positive, indicating that competition in quality is more
important in shaping the productivity-price nexus. However, the coefficients of financial constraints
are significantly negative. This result implies that the resulting reduction of external finance costs from
slack financial constraints could sufficiently neutralize the quality upgrading effects, which leads a
negative relationship between financial condition and export price. Firms with better financial condi-
tions are more likely to engage in price competition.
The estimates for the rich destination sample are very similar to the full destination estimates, only
differing in the magnitudes of the coefficient. Regarding the poor destination estimates, the results
from the two-stage model show that export prices respond positively to market size and firm
productivity but have no clear-cut connections with financial constraint. This finding suggests that
quality competition prevails in larger markets and for more productive firms, while financial condi-
tions are limited in determining whether firms compete in price or in quality for exporters to poor
markets.
In particular, the coefficients of PGDP have different signs in different income samples, implying a
nonlinear relationship between the importer’s income and export price. This finding could relate to the
fact that the least developed economies usually face serious problems of income inequality.5 Recent
studies have found that firms tend to export more high-quality products to destinations with more
unequal income distribution, and this effect disappears for high-income countries (Flach and Janeba
2017; Garcia-Marin 2014). In this sense, despite the weaker preference for higher-quality products, the
low-income importers could still afford average higher prices due to larger income disparities. This,
together with the prevailing quality preference effects in rich countries, yields the nonlinear response
of export price to income level.
Our findings are in line with the study of Gillingham et al. (2014). They also find that prices of
solar PV systems in the United States differ systematically both across and within geographic
locations. However, while they focus on domestic price and argue that generous financial incentives
for solar PV are associated with higher prices, we concentrate on export price and find that firms with
better financial conditions tend to charge lower prices. Furthermore, our findings also supplement
conventional wisdom on the sources of the competitive advantages of China’s solar PV products.
Lower prices are long believed to a key competitive differentiator between China and other leading
countries in solar power (Goodrich et al. 2013; Puttaswamy and Ali 2015), which has been complained
by European and American solar PV makers for years. However, in this article, we provide evidences
that the sources of competitive advantages enjoyed by China’s solar products vary across firms and
destination markets and also that quality competition is also important in boosting the rapid growth of
China’s solar PV industry.

Ordinary Trade and Processing Trade

Processing trade is one important way for Chinese PV firms to participate in international trade. In
2013, China’s firms exported 5.9 billion US dollars of solar PV products through processing trade,
accounting for nearly 40% of China’s total PV exports. China’s processing trade comprises two
subcategories: (1) processing and assembling and (2) processing with imported materials. Under
 QUALITY COMPETITION VERSUS PRICE COMPETITION 1337

both trade regimes, firms are granted duty exemptions on imported inputs as long as they are used
solely for processing, assembly, and resale in foreign markets. Several studies have demonstrated that
processing exporters in China are different from regular exporters, not only in firm performance
measures, such as productivity, profitability, skill intensity, and production costs, but also in the
response to changes in trade costs and financial friction (Dai, Maitra, and Yu 2016; Ma and Van
Assche 2010; Manova and Yu 2016). Yet empirical evidence of differences in export pricing behaviors
remains scant. In this subsection, we investigate how processing exporters differ from ordinary
exporters in export pricing decisions. Table 4 gives the results for ordinary trade and processing
trade, respectively.
In both cases, the coefficients of the inverse Mills ratios are statistically significant at the 1% level,
suggesting that the two-stage selection models are justified for both ordinary trade and processing
trade.
With respect to the core variables, the coefficients of market size, firm productivity, and financial
constraint provide consistent signs and are statistically significant in different regime models, indicat-
ing that ordinary exporters and processing exporters have similar pricing strategies. This confirms our

Table 4. Results for different trade regimes.

Ordinary trade Processing trade

Core variable GDP 0.985*** 0.536*

(0.152) (0.282)
TFP 0.339*** 0.518***
(0.0852) (0.145)
Financial constraint −0.147** −0.314***
(0.0653) (0.0923)
Control variable PGDP 0.532*** 1.143***
(0.0527) (0.161)
Solar capacity 0.186*** 0.135***
(0.0393) (0.0337)
Solar policy 0.372*** 0.349
(0.0996) (0.275)
Solar tariff 1.350 2.582
(2.823) (2.617)
Firm size 0.358*** 0.379***
(0.0235) (0.0627)
K/L 0.384*** 0.258***
(0.0658) (0.0950)
Age −0.198*** −0.188***
(0.0120) (0.0211)
SOE 1.575*** 1.411***
(0.146) (0.299)
Selection control 5.757*** 3.659***
(0.542) (1.244)
Year FE Yes Yes
Country FE Yes Yes
Province FE Yes Yes
R2 0.339 0.441
Observations 14,270 5,702

Notes: Standard errors clustered at the destination level are reported in parentheses. ***p < 0.01,
**p < 0.05, *p < 0.1.
1338 L. WANG ET AL.

findings above, that is, whereas competition in quality prevails in shaping the price–productivity nexus
and the relationship between price and market size, firms in better financial condition tend to be more
competitive in price.
Turning to the other determining factors of export prices, we find that most of the variables have the
consistent coefficients and significance levels for both ordinary and processing exporters. Export
prices are positively correlated with the importer’s income, solar capacity, firm size, capital intensity,
and state ownership and respond negatively to firm age. Furthermore, the insignificant coefficients of
the solar tariffs are indicative of the lower tariff pass-through rates. Solar policy is the only variable
with which export prices vary inconsistently, depending on the custom regimes. The implementation
of solar policies in the destination markets leads to increased export prices for ordinary exporters, but it
has no effect on prices for processing exporters. A possible explanation could be as follows: Under the
processing trade regime, firms use imported components to produce final goods and resell them in
foreign markets. As a result, their profit maximization and pricing decisions depend not only on trade
conditions but also on market conditions of imported components and the interaction of both (Ma and
Van Assche 2010). Thus, it is not surprising that processing exporters are less sensitive to the
implementation of solar policies.

Robustness Check
In this subsection, we conduct a battery of further robustness checks on our results. Table 5 presents
the robustness check results.
First, because the commodity class 854,140 comprises unrelated solar products, our constructed
price data can suffer from a certain level of measurement error. Further analysis here requires
excluding the price effect of these unrelated products. Given that most of the products are classified
into HS code 85,414,010 (light-emitting diodes) and could only be identified after 2009, we therefore
conduct our robustness check by estimating the 2009–2013 subsample after excluding the product
class 85,414,010. Column 1 in Table 5 demonstrates that excluding unrelated solar products does not
change our conclusions.
Second, export prices are prone to outliers, which likely reflect severe measurement errors and
might bias our empirical results. To show that our results are not driven by extreme values of export
prices, we remove observations that have export prices below the 5th percentile or above the 95th
percentile of the price distribution. Furthermore, large numbers of exporters quickly exited from
already-established export markets and never entered into any new markets during the sample period.6
These occasional exporters could set prices more arbitrarily, biasing our analysis. Therefore, we
further check robustness of our results by restricting our analysis to firms that have at least 10 PV
transaction records. Columns 2 and 3 in Table 5 present the results for the samples excluding outliers
and occasional exporters, respectively. The results are very close to those presented in Table 3.
Third, we check whether our results are driven by SOEs. SOEs are special with respect to market
access, finance environment, and the relationship with the Chinese government (Manova, Wei, and
Zhang 2015; Mattlin 2009; Song, Storesletten, and Zilibotti 2011). The close relationship between the
government and SOEs allows the state to treat the SOEs as instruments to implement particular policy
goals. This means that some important activities of the SOEs, such as price setting and adjustment of
investment, are strongly influenced by administrative orders rather than market conditions. Therefore,
SOEs are not necessarily profit-maximizing entities (Chen 2009; Manova, Wei, and Zhang 2015;
Opper, Wong, and Yang 2012). Robustness check results excluding SOEs are given in column 4 in
Table 5, which preserves the main features of our abovementioned results.
Finally, we perform a robustness check by using the ranking of firms’ export prices instead of price
levels. As Manova and Zhang (2012) point out, price ranking relies much less directly on the building
of export prices and is more sensitive to potential measurement errors. The rank results basically stay
unaltered; see column 5 in Table 5.
 QUALITY COMPETITION VERSUS PRICE COMPETITION 1339

Table 5. Robustness check results.

Excluding Excluding
unrelated Excluding occasional Excluding Using price
products outliers exporters SOEs ranking

Core variable GDP 0.538*** 0.686*** 0.790*** 0.767*** 0.156***

(0.153) (0.146) (0.175) (0.138) (0.0237)
TFP 0.165*** 0.296*** 0.556*** 0.438*** 0.124***
(0.0436) (0.0663) (0.0804) (0.101) (0.0177)
Financial constraint −0.240** −0.148** −0.195*** −0.152** −0.0628***
(0.0911) (0.0585) (0.0692) (0.0593) (0.0139)
Control variable PGDP 0.181 0.532*** 0.688*** 0.762*** 0.192***
(0.121) (0.0636) (0.0530) (0.0580) (0.0111)
Solar capacity 0.0919* 0.129*** 0.166*** 0.157*** 0.0339***
(0.0476) (0.0352) (0.0379) (0.0399) (0.00990)
Solar policy 0.493 0.378*** 0.326** 0.344** 0.0773***
(0.301) (0.103) (0.125) (0.135) (0.0240)
Solar tariff 1.725 1.162 1.534 1.276 0.416
(4.295) (2.515) (2.374) (2.204) (0.505)
Firm size 0.0861*** 0.256*** 0.299*** 0.288*** 0.0440***
(0.0268) (0.0222) (0.0278) (0.0249) (0.00740)
K/L 0.302*** 0.289*** 0.307*** 0.294*** 0.0714***
(0.0777) (0.0653) (0.0788) (0.0653) (0.0103)
Age −0.151*** −0.170*** −0.191*** −0.180*** −0.0424***
(0.0163) (0.0136) (0.0133) (0.0119) (0.00282)
SOE 0.695*** 1.341*** 1.623*** 0.452***
(0.208) (0.138) (0.150) (0.0414)
Selection control 3.531*** 4.339*** 4.939*** 4.842*** 0.990***
(0.625) (0.613) (0.704) (0.547) (0.0950)
Year FE Yes Yes Yes Yes Yes
Country FE Yes Yes Yes Yes Yes
Province FE Yes Yes Yes Yes Yes
R2 0.308 0.348 0.407 0.365 0.308
Observations 8,758 16,567 15,013 17,438 18,466

Notes: Standard errors clustered at the destination level are reported in parentheses. ***p < 0.01, **p < 0.05, *p < 0.1.

Conclusions
Ours is the first study that uses highly disaggregated data at a firm level to investigate the export
pricing decisions and competition patterns of China’s solar PV firms. Our sample covers 2,006 firms
and 140 destinations over the period 2000–2013.
The conclusions are summarized briefly as follows. First, there are substantial solar price disper-
sions across firms and destinations, even within narrowly defined 8-digit HS product categories.
Second, after controlling for selection bias, we find that more productive firms and firms exporting
to larger markets tend to compete in quality, while firms in better financial conditions are more likely
to engage in price competition. Finally, country characteristics and firm heterogeneity are also
important in explaining the vast differences in export prices. Although export prices fall systematically
with firm age, they respond positively to the importer’s income, electricity generation from solar
sources, implementation of solar policy, firm size, capital intensity, and their status as a SOE.
Our findings have several implications for policy. First, our findings supplement studies of the ways in
which China’s solar exporters compete in the international market, arguing that quality competition is also
1340 L. WANG ET AL.

important for China to dominate the global solar market. This conclusion provides theoretical rationalization
to understand clearly how to realize export profit, improve term of trade, increase national and even foreign
consumer’s welfare, and fight against antidumping policies. Second, our findings have implications for
policymakers. The Chinese government is progressively reducing the subsidy rates for solar products, which
reconciles with our findings that policies aimed at breeding market competition could trigger export quality
upgrading. Market protection under the shelter of excessive subsidies should be gradually removed, and
direct subsidies are suggested to be replaced by subsidies for R&D, technical cooperation, and other
innovations. Furthermore, considering subsidy cuts would produce different impacts on different types of
exporters, fewer subsidy cuts should be imposed on less productive firms that engage in price competition
and can thrive on lower subsidies. This would effectively maintain China’s current market share. Finally, our
findings also have implications for firm managers. While better access to finance allows firms to evade R&D
risk, undertake productive investment, and upgrade product quality, our findings suggest that China’s solar
exporting firms only compete in price. Therefore, solar producer’s efforts to introduce financial innovation
tools, broaden financing channels, and put more financial resources in R&D and innovation should have
strong potential to promote the quality of inputs and products.
However, by way of conclusion, our article also has some limitations that can be improved by further
research. First, our analysis relies on a 6-digit solar PV product group that comprises unrelated solar
products, anf further approach should be performed when more disaggregated product data are available.
Second, in this article, export prices are assumed to be uncorrelated across firms, destinations, and periods,
and dynamic and strategic pricing decisions are not accounted for. However, forward-looking and rational
PV exporters do just not care about current profits in certain markets. Instead, they pursue maximization of
overall expected profits in all markets during their total exporting periods. Export prices could respond to
any given prices charged by rival exporters and even by the firms themselves in other markets. This is
particularly important for multiproduct, multidestination, and continuing exporters. As such, future research
should aim for dynamic and strategic export pricing behaviors. Finally, this article focuses on the price
dispersion across exporting firms and foreign markets and sheds no light on the comparison between
export prices and domestic prices, as domestic prices are not available at the firm level. If domestic price
data are available, future studies into price differences and price interactions between domestic and foreign
markets could substantially improve our understanding of pricing patterns.

Funding
This work was supported by the Youth Project of the Beijing Social Science Foundation [15JGC154];
Program for Young Excellent Talents, Fundamental Research Funds for the Central Universities in
UIBE [15YQ07]; Youth Project of the National Social Science Foundation of China [14CJY001].

Notes
1. Trade data are obtained from the UN Comtrade database, and installed PV capacity data are obtained from
Solarpower Europe: global market outlook for solar power/2017-2021.
2. Author’s calculation based on the Chinese customs data.
3. This number is calculated based on 17,200 firms exporting to 200 destinations.
4. Author’s calculation based on the Chinese customs data.
5. According to the Gini index estimates from the World Bank, many of the least developed countries such as
South Africa, Namibia, Haiti, and Botswana are among the most unequal countries in terms of income
distribution.
6. In fact, 55% of exporters only have one transaction record in our sample.

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