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The comparative advantage of firms

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  • Johannes Boehm
  • Swati Dhingra
  • John Morrow

Abstract

Multiproduct firms dominate production, and their product turnover contributes substantially to aggregate growth. Theories propose that multiproduct firms grow by diversifying into products which need the same know-how or capabilities, but are less clear on what these capabilities are. Input-output tables show firms co-produce in industries that share intermediate inputs, suggesting input capabilities drive multiproduct production patterns. We provide evidence for this in Indian manufacturing: the similarity of a firm's input mix to an industry's input mix predicts entry into that industry. We identify the direction of causality from the removal of size-based entry barriers in input markets which made firms more likely to enter industries that were similar in input use to their initial input mix. We rationalize this finding with a model of industry choice and economies of scope to estimate the importance of input capabilities in determining comparative advantage. Complementarities driven by input capabilities make a firm on average 5% (and up to 15%) more likely to produce in an industry. Entry barriers in input markets constrained the comparative advantage of firms and were equivalent to a 10.5 percentage point tariff on inputs.

Suggested Citation

  • Johannes Boehm & Swati Dhingra & John Morrow, 2019. "The comparative advantage of firms," CEP Discussion Papers dp1614, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp1614
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    Cited by:

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    3. Kerstin Hotte, 2021. "Demand-pull and technology-push: What drives the direction of technological change? -- An empirical network-based approach," Papers 2104.04813, arXiv.org, revised Aug 2022.
    4. Bas,Maria & Fernandes,Ana Margarida & Paunov,Caroline, 2022. "How Resilient Was Trade to COVID-19 ?," Policy Research Working Paper Series 9975, The World Bank.
    5. Ina C. Jäkel, 2021. "Export Credit Guarantees: Direct Effects on the Treated and Spillovers to their Suppliers," Economics Working Papers 2021-09, Department of Economics and Business Economics, Aarhus University.
    6. Natalie Bau & Adrien Matray, 2020. "Misallocation and Capital Market Integration: Evidence from India," Working Papers 263, Princeton University, Department of Economics, Center for Economic Policy Studies..
    7. Ali, Nesma & Stiebale, Joel, 2021. "Foreign direct investment, prices and efficiency: Evidence from India," DICE Discussion Papers 363, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).

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    More about this item

    Keywords

    multiproduct firms; firm capabilities; vertical input linkages; comparative advantage; economies of scope; size-based policies;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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