How Firms Accumulate Inputs: Evidence from Import Switching

We uncover new dynamic patterns related to importers' age and the macroeconomic environment that static models cannot explain. Our patterns are related to imported input switching, i.e., the simultaneous adding and dropping of intermediates at the firm level. Three fact stand out. First, switching is pervasive and not a small fraction of firms’ imports. Second, conditional on age, larger firms are more likely to switch, whereas, conditional on size, younger firms switch more. Third, when import prices are high, fewer firms switch and switching shares fall. We propose a dynamic model where firms search for import suppliers and face a choice with heterogeneously productive intermediates. Through searching for suppliers, firms improve their productivity and grow over time. Empirically, we show that several key predictions of the model hold using within-firm regressions. Quantitatively, the unit cost bias from disregarding input heterogeneity is large and in a 15% tariff reduction policy experiment, we show the short-run gain from importing is 20% lower than the long-run gain for an average firm. Like capital accumulation and worker reallocation, supplier accumulation is important for firm dynamics and aggregate productivity. %In the context of the literature, we view our paper as complementary to those that emphasize capital accumulation and worker reallocation to be important for firm dynamics and aggregate productivity.