Imported intermediate goods and product innovation

We build a structural model of multi-product firms to illustrate how access to foreign intermediate goods contributes to product innovation. We establish a stochastic dynamic model of firm evolution and allow firms to be heterogeneous in their efficiency levels. The model’s mechanism to capture the...

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Bibliographic Details
Published in:Journal of international economics 2024-07, Vol.150, p.103927, Article 103927
Main Authors: Şeker, Murat, Ulu, Mehmet Fatih, Rodriguez-Delgado, Jose Daniel
Format: Article
Language:English
Subjects:
Endogenous product scope
Firm dynamics
Heterogeneous firms
Importing intermediate goods
Indian manufacturing sector
Innovation
Trade liberalization
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Summary:We build a structural model of multi-product firms to illustrate how access to foreign intermediate goods contributes to product innovation. We establish a stochastic dynamic model of firm evolution and allow firms to be heterogeneous in their efficiency levels. The model’s mechanism to capture the effects of importing intermediate goods is twofold: (i) importing these goods increases the revenue per each product introduced, and (ii) increases the likelihood of introducing new varieties using newly available inputs. We calibrate the model to firm-level data from India. The model successfully explains the heterogeneous innovation dynamics and statistical moments related to importing and product distribution. Counterfactual exercises further illustrate and quantify the mechanism between trade, innovation performance, and product growth. We find that the critical contribution of trade to growth and product innovation is mainly through access to new imported varieties rather than just the direct import cost.
ISSN:0022-1996
1873-0353
DOI:10.1016/j.jinteco.2024.103927