Using imported intermediate goods: Selection and technology effects

Abstract

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.

Globalization, Productivity Growth, and Labor Compensation

“…The effect of trade in intermediate inputs has been studied theoretically in Gibson and Graciano (2018) and Grossman and Helpman (2018). Both studies show that trade in intermediate inputs raises productivity.…”