Imported Intermediate Goods and Product Innovation: Evidence from India

Imported Intermediate Goods and Product Innovation: Evidence from India

Title:

Imported Intermediate Goods and Product Innovation: Evidence from India

Number:

15/37

Author(s):

Murat Şeker, Daniel Rodriguez-Delgado, Mehmet Fatih Ulu

Language:

English

Date:

December 2015

Abstract:

In this study, we build a structural model of multi-product firms that illustrates how access to new foreign intermediate goods contributes to product innovation. We establish a stochastic dynamic model of firm evolution allowing firms to be heterogeneous in their efficiency levels. Through introducing importing decision to this dynamic framework, we show that the effects of importing intermediate goods are twofold: i) it increases the revenues per each product created and ii) through the knowledge spillovers obtained from importing, firms become more likely to introduce new varieties. Calibration of the model to Indian data shows that the model can successfully explain the dynamics of product evolution and other moments related to importing and product distribution. Finally the comparison of autarky with trade equilibrium shows how liberalizing trade increases innovation performances and product growth.

Keywords:

Firm dynamics, Heterogeneous firms, Innovation, Endogenous product scope, Importing intermediate goods, Trade liberalization, Indian manufacturing sector

JEL Codes:

F12; F13; L11; O31

Imported Intermediate Goods and Product Innovation: Evidence from India
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