1. Imported intermediates and productivity: Does absorptive capacity matter? A firm-level analysis for Uruguay Adriana Peluffo Dayna Zaclicever (UDELAR, Uruguay) Arnoldshain Seminar XI Migration, Development, and Demographic Change: Problems, Consequences and Solutions June 25 – 28, 2013 University of Antwerp, Belgium

2. Motivation Empirical strategy Data Results Concluding remarks Imported intermediates and productivity: Does absorptive capacity matter? A firm-level analysis for Uruguay 2 Outline

3. Motivation Role of international trade as a vehicle for productivity- enhancing technology diffusion (open-economy endogenous growth models): – International trade may contribute to productivity and economic growth by diffusing technical knowledge across countries – Two trade-related channels for technology transfer: 1) imports of intermediate and capital inputs: access to a larger variety and/or better quality of inputs in which new technologies are embodied 2) learning by exporting: access to technical expertise from foreign buyers (new product designs and production methods) Particularly relevant for developing economies, where domestic R&D efforts are generally low Imported intermediates and productivity: Does absorptive capacity matter? A firm-level analysis for Uruguay 3

4. Empirical work on the impact of imported intermediates: Imported intermediates and productivity: Does absorptive capacity matter? A firm-level analysis for Uruguay 4 Motivation Country-levelFirm-level Coe and Helpman (1995), Verspagen (1997), Keller (1999), Navaretti and Soloaga (2002), Park (2004), Schiff and Wang (2004): evidence on import- related international technology spillovers that lead to productivity gains in the absorbing countries Problem: aggregate data do not allow controlling for differences across firms, which may be correlated with the use of imported inputs and lead to biased estimates Van Biesebroeck (2003), Muendler (2004), and Vogel and Wagner (2010): imported inputs have a minor or no significant effect on productivity in Colombia, Brazil and Germany, respectively Kasahara and Rodrigue (2008), Lööf and Andersson (2008), Goldberg et al. (2010), and Halpern, Koren and Szeidl (2011): firms access to new imported intermediates produces substantial productivity gains in Chile, Sweden, India and Hungary, respectively

5. Some recent studies for Uruguay: – Peluffo (2010) and Peluffo (2012): firm-level analyses for the periods 1997-2001 and 1988-2005, respectively, find considerable productivity gains from using imported intermediates – Zaclicever and Pellandra (2013): firm-level analysis for the period 1997-2008, finds a positive impact of foreign inputs on productivity, increasing with the number of varieties imported and the technology embodied in them; the effect is stronger for inputs imported from advanced economies Imported intermediates and productivity: Does absorptive capacity matter? A firm-level analysis for Uruguay 5 Motivation

6. Does absorptive capacity matter? – The ability of a country to benefit from imported technologies depends on its capacity to adopt and efficiently implement technology from abroad (Barba Navaretti and Soloaga, 2002). – Human capital is central in technology transfer, largely influencing the adoptive capacity of firms (Hoppe, 2005). – However, many empirical studies fail to support the role of absorptive capacity in determining the successful of international technology transfer: most works are country or industry level analyses, based on aggregate measures of human capital that do not capture the actual skill levels of the workforce. – Better assessment of the impact of international technology spillovers: micro-level analysis based on more precise measurements of firms' capacity to absorb new technologies. Imported intermediates and productivity: Does absorptive capacity matter? A firm-level analysis for Uruguay 6 Motivation

7. Augier, Cadot and Dovis (2012) find that the enhancing effect of imported intermediate and capital inputs on Spanish manufacturing firms productivity is stronger for skilled-labour intensive firms (i.e. firms with greater absorptive capacity) What about a small developing country like Uruguay? Using a panel of manufacturing firms (1997-2008) we explore the impact of imported inputs on Uruguayan firms productivity and evaluate whether the effect is mediated by the firms absorptive capacity (proxied by the proportion of skilled labour) Imported intermediates and productivity: Does absorptive capacity matter? A firm-level analysis for Uruguay 7

8. Empirical strategy We follow an indirect (two-stage) approach: 1.we estimate total factor productivity (TFP) at the firm level using the Levinsohn and Petrin (2003) methodology (also Olley and Pakes (1996), for robustness check) 2.we use impact evaluation techniques (propensity-score matching and difference-in-differences) to analyze the effect of imported inputs on firms productivity: – we estimate the effect of imported intermediates (the treatment) on the productivity of those firms that start using imported inputs (the treated group) relative to those that do not (the control group) – we evaluate whether the effect of switching to imported intermediates is mediated by the firms absorptive capacity Imported intermediates and productivity: Does absorptive capacity matter? A firm-level analysis for Uruguay 8

9. Empirical strategy Imported intermediates and productivity: Does absorptive capacity matter? A firm-level analysis for Uruguay 9 Second-stage estimated equation: where: TFP it first stage estimate of firms productivity it treatment variable (1 if firm i switches import status at t, 0 otherwise) mshare it share of imported inputs in firms intermediate purchases skill it proportion of skilled workers in firms labour force (professionals and technicians over total employment) X it vector of firm and industry characteristics (control variables) j industry dummies t time dummies absorptive capacity

10. Empirical strategy Imported intermediates and productivity: Does absorptive capacity matter? A firm-level analysis for Uruguay 10 variabledescription firm sizelagged log of number of employees capital intensitylagged log of capital-labour ratio profit-value added ratiolagged profit-value added ratio export intensitylagged share of exports in firms total sales foreign ownership1 if foreign capital is present in firms total capital, 0 otherwise market concentration four-digit level Herfindhal index of market concentration Control variables

11. Empirical strategy Imported intermediates and productivity: Does absorptive capacity matter? A firm-level analysis for Uruguay 11 Additional specifications: Pre-importing indicator variable: Alternative treatment variables: where: stay1 it 1 if firm i started importing at t-1 and remains importing at t (0 otherwise) stay2 it 1 if firm i started importing at t-2 and remains importing at t (0 otherwise) stay3 it 1 if firm i started importing at t-3 and remains importing at t (0 otherwise) 1 at time t if the firm starts or re-starts importing at time t+1 (0 otherwise) alternative treatment variable (# = 1 to 3)

12. Data Unbalanced panel of Uruguayan manufacturing firms (period 1997- 2008): annual data on sales (domestic and exports), value added (by components), intermediate inputs (domestically-purchased and imported), capital, energy, other expenditures, employment (by category), and foreign ownership 1,444 different firms present at least in one period, with an average of 672 firms per year and a total of 8,063 firm-year observations Firms are classified into three categories: i) non-importers: firms that never imported intermediate inputs (53.8%) ii) importers: firms that always imported intermediates (23.3%) iii) switchers: firms that switch import status (22.9%) Imported intermediates and productivity: Does absorptive capacity matter? A firm-level analysis for Uruguay 12

13. Descriptive statistics Imported intermediates and productivity: Does absorptive capacity matter? A firm-level analysis for Uruguay 13 Notes: a) Millions of constant Uruguayan pesos (base year 1997); b) Total employment (number of employees); c) Professionals and technicians over total employment All Non-importing firms Importing firms Switchers Number of firms1,444777336331 Number of observations8,0633,1852,2272,651 Output a 74.0037.75114.5683.47 Value added a 32.7611.4551.9942.23 Capital a 15.699.1524.0116.53 Intermediate inputs a 27.2319.8140.1525.27 Labour b 81.5945.79117.5094.45 Skilled-labour share c 2.461.333.902.60 Capital-labour ratio10.8710.2811.2911.19 Export share15.998.2724.9317.49 Import share26.1061.2726.53 Age27213231 Averages 1997-2008

14. Balancing score tests (propensity score matching) Imported intermediates and productivity: Does absorptive capacity matter? A firm-level analysis for Uruguay 14 Mean t-test VariableTreatedControl%biastp>t TFP 8.4238.442-2.1-0.220.825 Labour 3.9273.8774.70.510.612 Capital-labour ratio 11.21311.0959.00.980.328 Averare wage 11.12511.0806.10.680.494 Export share 0.1900.1783.90.410.680 Profit-value added ratio 0.1060.133-1.3-0.200.844

15. Results (1): IV regressions of Levinsohn-Petrin TFP estimate Imported intermediates and productivity: Does absorptive capacity matter? A firm-level analysis for Uruguay 15 Robust standard errors in parentheses; *** p<0.01, ** p<0.05, * p<0.1 (1)(2)(3)(4) theta1.399***1.056***-1.067***-1.056*** (0.082)(0.118)(0.108)(0.111) Import share (mshare)0.687***0.506***0.530*** (0.056)(0.057)(0.059) Skilled-labour share (skill)2.144***1.649***1.366*** (0.406)(0.415)(0.319) skill*mshare2.240*3.041***3.434*** (1.204)(1.055)(0.992) Size (total employment)0.114*** (0.017) Capital-labour ratio-0.0404***-0.0435*** (0.013) Profit-value added ratio0.0399**0.0395** (0.017) Export share0.287***0.278*** (0.069)(0.070) Foreign capital0.387***0.378*** (0.054)(0.056) Herfindhal index0.413***0.422*** (0.121) Pre-importing period0.216*** (0.065)

16. Results (2): IV regressions of Levinsohn-Petrin TFP estimate Imported intermediates and productivity: Does absorptive capacity matter? A firm-level analysis for Uruguay 16 Robust standard errors in parentheses; *** p<0.01, ** p<0.05, * p<0.1 (1)(2)(3)(4)(5)(6) stay10.979***0.986*** (0.132)(0.131) stay21.060***1.049*** (0.117)(0.118) stay31.222***1.218*** (0.114)(0.116) Import share (mshare)0.560***0.598***0.608***0.642***0.606***0.640*** (0.063)(0.065)(0.062)(0.064)(0.072)(0.075) Skilled-labour share (skill)1.605***1.341***1.557***1.297***1.418***1.119*** (0.444)(0.350)(0.443)(0.349)(0.499)(0.379) skill*mshare2.771**3.149***3.397***3.764***3.653***4.068*** (1.165)(1.100)(1.156)(1.085)(1.227)(1.129) Pre-importing period0.224***0.195***0.184** (0.063)(0.065)(0.076)

17. Concluding remarks We found evidence of an enhancing effect of imported intermediate inputs on Uruguayan manufacturing firms productivity (robust across the variety of specifications considered). Labour-force skills raise firms TFP directly and also through their interaction with imported intermediates (i.e. the effect of switching to imported inputs depends on firms capacity to absorb the technology embodied in those inputs). Implications: trade-liberalization policies would have a greater impact on productivity if they are accompanied by educational policies aiming at improving the skill level of the labour force. Imported intermediates and productivity: Does absorptive capacity matter? A firm-level analysis for Uruguay 17

18. Thank you Adriana Peluffo Institute of Economics, School of Economics, University of the Republic (UDELAR), Uruguay apeluffo@iecon.ccee.edu.uy Dayna Zaclicever Department of Economics, School of Social Sciences, University of the Republic (UDELAR), Uruguay dayna@decon.edu.uy Imported intermediates and productivity: Does absorptive capacity matter? A firm-level analysis for Uruguay 18