Quality of firms' imports and distance to countries of origin: First evidence from Germany

This paper documents a new fact: The quality of goods imported by German firms increases with distance to the countries of origin. This holds after controlling for fixed effects for goods, for firms, and for firm-product combinations. The empirical investigation uses a tailor-made new data set of 3,204,851 observations for import quality (measured by the unit value of imports) at the firm-product-origin level for the reporting year 2011. Data are from 138,688 firms that imported 4,986 products (recorded at the HS6-level) in 1,938,602 firm-product combinations from 175 countries. Trade costs - which are related to distance - lead to within-firm selection of product quality across countries of origin. Firms that import multiple vertically-differentiated varieties of a product source higher quality varieties on more distant markets.