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The Comparative Advantage of Firms

Johannes Boehm, Swati Dhingra and John Morrow ()

CEP Discussion Papers from Centre for Economic Performance, LSE

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.

Keywords: multiproduct firms; firm capabilities; vertical input linkages; comparative advantage; economies of scope; size-based policies (search for similar items in EconPapers)
JEL-codes: F11 L25 M2 O3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-com, nep-ind and nep-tid
Date: 2019-04
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Working Paper: The Comparative Advantage of Firms (2019) Downloads
Working Paper: The Comparative Advantage of Firms (2019) Downloads
Working Paper: The Comparative Advantage of Firms (2019) Downloads
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