Collective Reputation in Trade: Evidence from the Chinese Dairy Industry

Abstract

The existence of collective reputation implies an important externality. Among firms trading internationally, quality shocks about one firms products could affect the demand of other firms from the same origin country. We study such reputation spillover in the context of a large-scale scandal that affected the Chinese dairy industry in 2008. Leveraging detailed firm-product level administrative data and official quality inspection reports, we document sizable reputation spillovers on uncontaminated firms. We further investigate potential mechanisms that could mediate the strength of collective reputation, including information accuracy, observability of the supply chain and prior export experience.

How can trade partners be chosen when facing food scandals? China's milk scandal as a natural experiment

“…4 The melamine scandal, which was widely covered by domestic and foreign media, is considered an unforeseen major risk event; it caused domestic and foreign consumers and distributors of import and export commodities to attach importance to the safety of dairy products in China (Yang et al, 2019). The whole dairy industry was greatly affected, and even enterprises that were not illegally adding melamine to dairy products saw a significant drop in their sales (Bai et al, 2022).…”

“…Stronger government regulations may exert the cost of trade and lead to a reduction in export volumes (Bai et al, 2022). After the 2008 scandal, several destinations imposed explicit import bans on Chinese dairy products, and some of these regulatory hurdles may have arisen from protectionist motives.…”

“…This incident had grave consequences for Chinese citizens and the Chinese milk industry. By December 2008, four infants had died, 51,900 children were hospitalised and 700 tonnes of milk powder had been recalled nationwide (Bai et al, 2022). Making fraud vulnerability assessments is the first step towards food fraud prevention and mitigation.…”

“…Secondly, most papers on food scandals and trade have concentrated on the entire import and export industry across the globe. Some research has pointed out that the imports of scandal‐related products will increase and exports decrease accordingly after a food scandal (Bai et al, 2022; Dang & Xu, 2018). In addition, after a food scandal, suppliers will have a much higher negative effect on trade than before (Schaefer et al, 2018).…”

Food safety, reputation, and regulation

“…Numerous firms were identified as producing contaminated milk products, and dozens of countries banned the import of certain dairy products from China. Bai et al (2021) use a difference‐in‐differences (DID) regression model and find that dairy exports fell by 68% following the scandal 14 . Breaking down the results to identify spillover effects, the authors find that contaminated firms' export revenues fell by 84% following the scandal, while spillover effects caused the export revenues of firms without contamination to fall by 54% 15…”