The connection between imported intermediate inputs and exports: Evidence from Chinese firms

We use Chinese manufacturing firm data to estimate the causal effect of increased imported intermediate input use on firm export outcomes. To account for the endogeneity of import decisions, we pursue an IV strategy that utilizes instruments for import costs connected to intermediate input import tariffs, exchange rates, and firm differences in fixed trade costs. We find that firms that expanded their intermediate input imports expanded the volume and scope of their exports. Further, we find that the benefit of imported inputs differed along a number of dimensions including initial trade status, import source country, export destination, firm ownership, and industry R&D intensity. Although increased imports of intermediates boosted exports by all firms, we find that the effects were largest when they were purchased by private firms or firms that started out as non traders. In addition, intermediate inputs from the higher-income G7 countries were especially helpful in facilitating firm exports to the presumably more-demanding G7 export markets. Taken together, these results suggest that product upgrading facilitated by technology or quality embedded in imported inputs helped Chinese firms to increase the scale and breadth of their participation in export markets. (C) 2016 Elsevier B.V. All rights reserved.