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Importing intermediate goods to foster French firms’ productivity and exports

Commerce & Mondialisation Compétitivité & Croissance 
Billet du 15 octobre 2012
Par Maria Bas, Vanessa Strauss-Khan
International trade plays a key role in technological diffusion. In a recent work, we show how firms can improve their competitiveness and export performance through importing more varieties of high quality or lower cost intermediate goods.
Should trade policy fight or promote imports of intermediate inputs? While several studies evidenced the recent increase in imports of intermediate goods, their role in shaping domestic economies is not yet completely understood. A very large literature focuses on the impact of imported intermediate inputs on employment and inequality and concludes on the existing (although limited) role of outsourcing in explaining job and wages decrease. By contrast, the literature on endogenous growth provides theoretical grounds for the role of these foreign inputs in enhancing efficiency gains and economic growth at the aggregate level. At the microeconomic level, imports of intermediate inputs allow firms to have access to a bigger range of inputs, including more sophisticated or lower cost ones. Foreign inputs have already been associated with firm productivity improvements. Since imported intermediate goods enhance firms' efficiency, they should also be an important asset for exporting activities.
 
There are several mechanisms through which foreign inputs could affect firm competitiveness and export performance. 
- The first mechanism is the variety/complementarity channel. By accessing new varieties of intermediate goods, firms expand the set of inputs used in production and therefore reach a better complementarity between inputs, leading to increased efficiency gains. This allows more firms to engage the export markets and to export more varieties. 
- The second channel is related to an input cost effect. Importing lower price intermediate inputs increases firms' competitiveness and revenues. The access to low-price inputs allows more firms to enter export markets and expand export revenues. 
- A third mechanism is foreign technology transfer. International trade promotes economic growth through the diffusion of modern technologies embodied in imported intermediate inputs. Technology transfer is also related to quality transfer: imports of high-quality intermediate inputs lead to the export of high-quality goods. Therefore, firms can access new export markets with better quality/technology products, or export more varieties to existing markets.
 
Evidence from French firms involved in international trade reveals that these mechanisms are important drivers of firms' export patterns. French firms importing more varieties of intermediate inputs have increased their productivity gains by 2.5% over the 1995-2005 period. Importing more input varieties also raises firm export varieties. And as they enhance productivity, importing more inputs make the firm more likely to export and survive in competitive export markets. Direct channels are also at play: controlling for productivity gains indicates that a 10% increase in the number of imported inputs varieties raises the range of export products by 16%.
 
The input cost effect and the foreign technology/quality transfer channel might be distinguished by looking at the country of origin of imported inputs. The most developed countries produce goods with high technology/quality content, whereas developing countries provide low-price inputs. In the case of French exporting firms, foreign inputs from the most advanced economies have the strongest effect on firm productivity than importing low-input costs from developing countries. In the case of export scope, both imported inputs from developed and developing countries help to raise the number of export varieties.

All in all, French firms benefit from importing intermediate goods as it fosters both their productivity and exports. These results are interesting to shed some new light on the debate on the benefits and costs of trade integration.
 

Bas,M. and Strauss-Khan,V. [2011] “Does importing more inputs raise exports? Firm level evidence from France”, CEPII Working Paper, 2011-15.
 
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