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The Comparative Advantage of Firms

Author

Listed:
  • Johannes Boehm

    (Département d'économie)

  • null null

    (Centre for Economic Performance)

  • John Morrow

    (King‘s College London [London])

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 & null null & John Morrow, 2019. "The Comparative Advantage of Firms," Sciences Po publications 2019-07, Sciences Po.
  • Handle: RePEc:spo:wpmain:info:hdl:2441/1dn2prktaq9p3949il1h9ds86b
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    Cited by:

    1. 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..
    2. 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.
    3. Chor, Davin & Manova, Kalina & Yu, Zhihong, 2021. "Growing like China: Firm performance and global production line position," Journal of International Economics, Elsevier, vol. 130(C).
    4. Bau, Natalie & Matray, Adrien, 2020. "Misallocation and Capital Market Integration: Evidence From India," CEPR Discussion Papers 14282, C.E.P.R. Discussion Papers.
    5. 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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