Using imported intermediate goods: Selection and technology effects

Producers that use imported intermediate goods tend to be much larger and more productive than others. Some of this is due to a selection effect: the most productive producers self‐select into importing because only they can overcome the fixed costs of developing trade relationships with foreign inp...

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Bibliographic Details
Published in:Review of international economics 2018-05, Vol.26 (2), p.257-278
Main Authors: Gibson, Mark J., Graciano, Tim A.
Format: Article
Language:English
Subjects:
Economic models
Finished goods
Fixed costs
Imports
Productivity
Profits
Technology
Trade relations
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Summary:Producers that use imported intermediate goods tend to be much larger and more productive than others. Some of this is due to a selection effect: the most productive producers self‐select into importing because only they can overcome the fixed costs of developing trade relationships with foreign input suppliers. Some of this is due to a technology effect: any given producer would have higher variable profits from operating the technology using imported intermediate goods. To account for the roles of these theoretical mechanisms, we develop a simple model of a competitive small open economy in which heterogeneous firms endogenously decide whether to use imported intermediate goods. The technology that uses imported intermediate goods is superior but requires a higher fixed cost of operating. The calibrated model captures the large performance advantage of importers and quantifies the selection and technology effects.
ISSN:0965-7576
1467-9396
DOI:10.1111/roie.12325