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The Comparative Advantage of Firms

Author

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  • Boehm, Johannes
  • Dhingra, Swati
  • Morrow, John

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

  • Boehm, Johannes & Dhingra, Swati & Morrow, John, 2019. "The Comparative Advantage of Firms," CEPR Discussion Papers 13699, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:13699
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    References listed on IDEAS

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    More about this item

    Keywords

    comparative advantage; Economies of scope; firm capabilities; Multiproduct Firms; size-based policies; vertical input linkages;

    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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