The Intensive Margin of Imports and Firm Productivity

We study the behavior of firms as importers using a micro dataset of French manufacturing firms. We focus on firms' allocation of expenditure across different inputs and different supplying countries (varieties) of each input. We consider a general framework that nests the available models of import demand as special cases. In the model, firms are heterogeneous in their factor neutral productivity, production is subject to constant returns and input qualities are common across firms. We show that the theory has a robust intensive margin prediction: conditional on the sourcing strategy, defined as the list of products and varieties sourced, expenditure shares across products and varieties are fully determined by price-adjusted qualities, that is, by characteristics of the supplying country. In particular, firm productivity should not affect relative input demand once the sourcing strategy is controlled for. Our main contribution lies on providing a careful test of this prediction. Using a micro data set of French firms we show that this property is not supported by the data. The particular direction in which the theory is rejected is economically meaningful: holding firms' sourcing strategy fixed, larger firms spend a higher proportion of their budget on their most important variety and on varieties that are more expensive. We interpret these results as evidence of a complementarity between firm productivity and input quality.