Imported intermediate goods and product innovation

Murat Şeker, Mehmet Ulu and Jose Daniel Rodriguez-Delgado

Journal of International Economics, 2024, vol. 150, issue C

Abstract: We build a structural model of multi-product firms to illustrate how access to foreign intermediate goods contributes to product innovation. We establish a stochastic dynamic model of firm evolution and allow firms to be heterogeneous in their efficiency levels. The model’s mechanism to capture the effects of importing intermediate goods is twofold: (i) importing these goods increases the revenue per each product introduced, and (ii) increases the likelihood of introducing new varieties using newly available inputs. We calibrate the model to firm-level data from India. The model successfully explains the heterogeneous innovation dynamics and statistical moments related to importing and product distribution. Counterfactual exercises further illustrate and quantify the mechanism between trade, innovation performance, and product growth. We find that the critical contribution of trade to growth and product innovation is mainly through access to new imported varieties rather than just the direct import cost.

Keywords: Firm dynamics; Heterogeneous firms; Innovation; Endogenous product scope; Importing intermediate goods; Trade liberalization; Indian manufacturing sector (search for similar items in EconPapers)
JEL-codes: F12 F13 L11 O31 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:150:y:2024:i:c:s0022199624000515

DOI: 10.1016/j.jinteco.2024.103927

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