Using imported intermediate goods: Selection and technology effects

• 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
• ISSN: 0965-7576; 1467-9396
• DOI: 10.1111/roie.12325

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.