Use of Imported Inputs and the Cost of Importing: Evidence from Developing Countries

Abstract

For a representative sample of manufacturing firms in 26 countries, the paper shows that changes in the cost of importing over time is significantly and negatively correlated with changes in the percentage of firm’s material inputs that are of foreign origin. In short, import costs matter and significantly so for a firm’s decision to use foreign vs. domestic inputs. This is important as recent studies indicate a significant positive effect of the use foreign input on firm productivity and growth. Furthermore, we show that there may be a non-linear relationship between import costs and imports. We hope that the present paper will inspire more work towards the determinants of the use of imported inputs by firms in developing and developed countries.