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Technological Change, Trade in Intermediates and the Joint Impact on Productivity

  • Bøler, Esther Ann
  • Moxnes, Andreas
  • Ulltveit-Moe, Karen-Helene

This paper examines the interdependence between innovation and imports of intermediates, and their joint impact on productivity. We do so by developing a quantitative model with heterogeneous firms and international trade where firms can invest in R&D and source inputs internationally. Innovating firms on average become more productive, thereby enabling them to cover the fixed costs of sourcing foreign inputs, which in turn also has a benign impact on measured productivity. Using Norwegian firm-level data on R&D and trade in intermediates, we structurally estimate the model and find that both imports and R&D investment play a key role in explaining firm-level productivity growth. Moreover, the estimated returns to R&D are significantly lower after controlling for the complementarity between R&D investments and imports. We exploit the introduction of an R&D tax credit scheme in Norway in 2002, which lowered the marginal cost of R&D substantially. The estimated structural model can explain most of the observed increase in trade in intermediates as more firms started to innovate, underscoring the quantitative importance of our theoretical mechanism. Moreover, one fifth of measured productivity growth among new innovators came from increased foreign sourcing, rather than technology upgrading, illustrating how trade can amplify productivity gains. An implication of our work is that lower input trade barriers promote technological change. Hence, our work offers a new mechanism through which imports increase productivity, which may help explain why a number of studies find firm-level productivity gains associated with input trade liberalization.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8884.

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Date of creation: Mar 2012
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Handle: RePEc:cpr:ceprdp:8884
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  1. László Halpern & Miklós Koren & Adam Szeidl, 2011. "Imported Inputs and Productivity," CeFiG Working Papers 8, Center for Firms in the Global Economy, revised 16 Sep 2011.
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  23. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," Review of Economic Studies, Wiley Blackwell, vol. 70(2), pages 317-341, 04.
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  25. Petia Topalova, 2004. "Trade Liberalization and Firm Productivity; The Case of India," IMF Working Papers 04/28, International Monetary Fund.
  26. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 317-341.
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