Using imported intermediate goods: Selection and technology effects. Issue 2 (26th September 2017)

• Record Type: Journal Article
• Authors: Gibson, Mark J.; Graciano, Tim A.
• Is Part Of: Review of international economics. Volume 26:Issue 2(2018)
• Page Start: 257
• Page End: 278
• Publication Date: 2017-09-26
• Subjects: International economic relations -- Periodicals; International finance -- Periodicals; Economic policy -- Periodicals; 330
• DOI: 10.1111/roie.12325
• Languages: English
• ISSNs: 0965-7576

Abstract

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.