Firm Size, Quality Bias and Import Demand

Claire Lelarge, Joaquin Blaum and Michael Peters

No 13700, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Commonly used firm-based models of importing imply that firm productivity should have no effect on the allocation of expenditure across a common set of sourcing countries. Using French data, we show that this homotheticity property is soundly rejected: larger firms concentrate their import spending on their top varieties, holding the sourcing strategy fixed. To rationalize this finding, we propose a novel model of importing that features (i) a complementarity between firm productivity and input quality and (ii) heterogeneity across countries in their ability to produce high quality inputs. This model implies that large firms bias their spending towards countries with a comparative advantage in producing high quality inputs and hence generates a non-homothetic import demand system. We provide empirical support for this and other predictions of this theory.

Keywords: Trade in intermediate inputs; Firm heterogeneity; Firm size; Non-homothetic import demand; Quality-productivity complementarity (search for similar items in EconPapers)
JEL-codes: D21 D22 D24 F11 F12 F14 (search for similar items in EconPapers)
Date: 2019-04
New Economics Papers: this item is included in nep-bec and nep-int
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Citations: View citations in EconPapers (11)

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Journal Article: Firm size, quality bias and import demand (2019)
Working Paper: Firm Size, Quality Bias and Import Demand (2019)
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