Technological Change, Trade in Intermediates and the Joint Impact on Productivity

39 Pages Posted: 4 Apr 2012

See all articles by Esther Ann Bøler

Esther Ann Bøler

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Andreas Moxnes

University of Oslo - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Karen Helene Ulltveit-Moe

University of Oslo - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: March 2012

Abstract

This paper examines the interdependence between innovation and imports of intermediates, and their joint impact on productivity. We do so by developing a quantitative model with heterogeneous firms and international trade where firms can invest in R&D and source inputs internationally. Innovating firms on average become more productive, thereby enabling them to cover the fixed costs of sourcing foreign inputs, which in turn also has a benign impact on measured productivity. Using Norwegian firm-level data on R&D and trade in intermediates, we structurally estimate the model and find that both imports and R&D investment play a key role in explaining firm-level productivity growth. Moreover, the estimated returns to R&D are significantly lower after controlling for the complementarity between R&D investments and imports. We exploit the introduction of an R&D tax credit scheme in Norway in 2002, which lowered the marginal cost of R&D substantially. The estimated structural model can explain most of the observed increase in trade in intermediates as more firms started to innovate, underscoring the quantitative importance of our theoretical mechanism. Moreover, one fifth of measured productivity growth among new innovators came from increased foreign sourcing, rather than technology upgrading, illustrating how trade can amplify productivity gains. An implication of our work is that lower input trade barriers promote technological change. Hence, our work offers a new mechanism through which imports increase productivity, which may help explain why a number of studies find firm-level productivity gains associated with input trade liberalization.

Keywords: Imports, innovation, intermediate inputs, productivity, R&D

JEL Classification: F10, F12, F14, O30, O33

Suggested Citation

Bøler, Esther Ann and Moxnes, Andreas and Ulltveit-Moe, Karen Helene, Technological Change, Trade in Intermediates and the Joint Impact on Productivity (March 2012). CEPR Discussion Paper No. DP8884, Available at SSRN: https://ssrn.com/abstract=2034102

Esther Ann Bøler (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Andreas Moxnes

University of Oslo - Department of Economics ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Karen Helene Ulltveit-Moe

University of Oslo - Department of Economics ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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