Domestic Demand Upgrading, Product Mix Adjustment, and Export Competition Strategy

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This paper incorporates non-homothetic preferences and the product quality ladder assumption into a model of heterogeneous multi-product firms from the perspective of scale and quality to investigate the differential impact of domestic demand upgrading on firm resource reallocation and export strategies. The theory suggests that, compared to basic products, emerging products possess higher prices and superior quality. Therefore, in response to the expansion of the domestic demand scale, firms concentrate on producing and exporting basic products, adopting a cost-competitive strategy of “small profits but quick turnover” in exports. Conversely, upgrading the domestic demand structure incentivizes firms to produce and export a greater variety of emerging products, pursuing a quality-competitive strategy of “high quality at a premium price.” Further analysis of the impact mechanisms has revealed that demand scale expansion intensifies market competition and reduces export costs, prompting firms to narrow their export scope and gain price advantages in exports. By contrast, demand structure upgrading alleviates market competition and enhances export quality, enabling surviving firms to introduce more high-quality emerging product variety and achieve export quality advantages. Using Chinese firm-level microdata from 2000 to 2014, this paper empirically validates the above propositions. Against the backdrop of the world entering a new period of turbulence and transformation, this study provides micro-level evidence and policy implications for leveraging the scale and structural advantages of domestic demand to promote stable and quality-enhanced exports.