Trade Models with Heterogeneous Firms: What About Importing?

Mark Gibson () and Tim Graciano

MPRA Paper from University Library of Munich, Germany

Abstract: Intermediate goods make up a large share of world trade. Yet trade models with heterogeneous firms focus almost exclusively on firms’ export decisions rather than their import decisions. We develop an analytically solvable model of a small open economy in which heterogeneous firms make endogenous import decisions. We view decisions about importing as decisions about technology adoption. In our model, firms weigh the benefit of operating a technology that uses imported intermediate goods against the fixed cost of developing trade relationships with foreign input suppliers. Similar to the selection effect in standard export-decision models, only the most efficient firms choose to import. In addition, the model features a technology upgrading effect, where importing improves a firm’s labor efficiency. The calibrated model quantifies the selection and technology upgrading effects, captures the large performance advantage associated with using imported intermediate goods, and generates large increases in trade from small decreases in tariffs.

Keywords: hetrogenious firms; importing; Chile; fixed costs (search for similar items in EconPapers)
JEL-codes: F1 (search for similar items in EconPapers)
Date: 2011-07-01
New Economics Papers: this item is included in nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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