Abstract: Under the new international competition pattern, external demand shocks have increased. It is of great necessity for enterprises to coordinate production and capacity to avoid the decline in capacity utilization, which is crucial for the security, stability, and high-quality development of China's industrial and supply chains. This article embeds endogenous product quality selection into the framework of the Melitz and Ottaviano's (2008) model, theoretically explaining the impact mechanism of negative international demand shocks on enterprises' capacity utilization, and quantitatively verifying the response mechanism of the cooridination of production and capacity. Research has found that the positive effects of production threshold and quality improvement caused by the decline in international demand can offset the negative effects of direct shocks. In this process, resource reallocation between and within enterprises can effectively improve the capacity utilization. Further analysis shows that industry characteristics have a significant impact, and the industry innovation level will enhance the capacity utilization improvement effect of negative international demand shocks. For industries with low capacity utilization, the capacity utilization improvement effect of negative international demand shocks is mainly due to production adjustment driven by quality upgrade. In industries with low levels of competition, high entry barriers, low extraversion, low product differentiation, and low technology intensity, negative international demand shocks can lead to a decrease in capacity utilization, while conversely, they increase the capacity utilization of industries with high levels of competition. This study aims to explore how to upgrade product quality and industrial structure in response to external shocks, thereby providing theoretical support and policy references for enhancing the security and stability of industrial and supply chains in promoting the effective improvement of quality and reasonable growth of quantity in the economy.
