Imports, supply chains and firm productivity

Abstract

This paper explores how competition-induced productivity gains from imports in intermediate producing sectors transmit through the supply chain. Based on firm-level panel data from Vietnam, we show that in addition to the productivity premium associated with importing intermediate inputs, firms that use domestically-produced inputs from more import-intensive sectors also have higher productivity. We find evidence that import competition leads to product differentiation, in particular higher quality output in sectors where there is greater scope for quality variation, leading to better quality domestically-produced inputs. We also find evidence that non-importing firms that experience productivity gains due to greater import intensity in upstream sectors change their input mix and become more capital intensive. We conclude that ignoring the gains from trade through this mechanism may significantly underestimate the impact of trade on productivity.