Discussion Paper Details

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Title: Input Reallocation Within Firms

Author(s): Hylke Vandenbussche and Christian Viegelahn

Publication Date: July 2016

Keyword(s): Firm level data, Importers, Input Reallocation, Multi-Product and trade policy

Programme Area(s): International Trade and Regional Economics

Abstract: This paper documents the within firm reallocation of inputs and outputs as a result of a trade policy shock on the input side. A unique firm input level dataset for India with information on different raw material inputs used in production, enables us to identify firms with imported inputs subject to trade policy. To guide the empirics, we first develop a back-bone model of heterogeneous firms that source inputs from abroad. We find that affected firms engage in input reallocation and lower their use of protected inputs by 25-40%, relative to other inputs. Especially large firms and multi-output firms skew their input use towards unprotected inputs. To identify the output reallocation ensuing trade protection on inputs, we develop a firm level input-output correspondence. Firms reduce their sales of outputs made of protected inputs on average by 50-80%, relative to sales of other outputs. We find a firm level decrease in markups, suggesting that the cost of imported inputs is only partially passed through to output prices. Thus, this paper documents a new channel through which trade protection negatively impacts input-using firms.

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Bibliographic Reference

Vandenbussche, H and Viegelahn, C. 2016. 'Input Reallocation Within Firms'. London, Centre for Economic Policy Research.