Intermediate Inputs, Firm Size, and Import Content of ... · Preliminaries Extend Gopinath and Neiman (2014) by adding exports market and demand shocks Two countries: home and foreign

Introduction Data and Facts Model Calibration Conclusion

Intermediate Inputs, Firm Size, and Import

Content of Production

Mehmet Fatih Ulu

Central Bank of Turkey

May 12, 2014


Introduction


Introduction

This paper is about intermediate goods and their joint role inboth trade and production processes.


Introduction


Trade in intermediate goods is big: 2/3 of all merchandiseflows.

60% - 70% of production costs is on intermediate goods.


Introduction


Trade in intermediate goods is big: 2/3 of all merchandiseflows.

60% - 70% of production costs is on intermediate goods.

We aim to quantify the role of costs attached to importingand exporting while explaining the relationship between firmsize, intermediate input imports, and export behavior.


Main Preliminary Findings

Costs attached to importing and exporting are sizeable anddecisive in domestic value-added creation.


Main Preliminary Findings

Costs attached to importing and exporting are sizeable anddecisive in domestic value-added creation.

Iceberg costs

Adaptation costs


About the Data

Combine two distinct datasets:

Trade transactions of Turkish manufacturing firms (NACE15-37) in 2008


About the Data

Combine two distinct datasets:

Trade transactions of Turkish manufacturing firms (NACE15-37) in 2008

Industry Census of Turkish manufacturing firms in 2008


Some Regularities

Figure : Intermediate Import Ratio By Exporter Status0

.1.2

.3.4

Ave

rage

Inte

rmed

iate

Impo

rt R

atio

0 20 40 60 80 100Size Percentile (in # Value of Production)

Exporters Non_Exporters


010

020

030

040

0N

umbe

r of

Firm

s


nooffirmsEXP nooffirmsALLnooffirmsNONEXP

Number of Fims by Size and Exporter Status

Figure : Number of Firms By Size and Exporter Status


Figure : Intermediate Import Ratio by Size (Within)

0.1

.2.3

.4.5

Ave

rage

Inte

rmed

iate

Impo

rt R

atio




Figure : Number of Imported Varieties vs. Fraction of Firms

1

10

100

1000

10000#

impo

rt v

arie

ties

(HS

12 −

cou

ntry

)

.001 .01 .1 1Fraction of Firms


Figure : Number of Import Varieties by Size (Within)

.01

.1

1

10

100

20 40 60 80 100

2008


log(

Ave

rage

Num

bero

f Im

port

ed V

arie

ties)

Size Percentile (in # Value of Production)

Graphs by year


Figure : Revenue by Size (Within)

.001

.01

.1

1

10

100

1000lo

g(A

vera

ge R

even

ue (

mill

ion

TL)

)




Previous Studies

Imported intermediate goods and productivityHalpern, Koren, and Szeidl (2011), Kasahara and Rodrigue(2008), Gopinath and Neiman (2014)

Joint analysis of import and export decisionsKasahara and Lapham (2012)

New intermediate goods and product scopeGoldberg et al. (2010)

Motives for importing intermediate inputsSaygili et al. (2010)


Preliminaries

Extend Gopinath and Neiman (2014) by adding exportsmarket and demand shocks


Preliminaries


Two countries: home and foreign


Preliminaries



Continuum of monopolistic firms in both markets


Preliminaries



Continuum of monopolistic firms in both markets

Production requires two types of input: labor L and a bundleof intermediate inputs X

Yi = Ai (Lp,i )1−µX

µi


Intermediate Goods

Zi and Mi are the bundles of domestic and importedintermediate inputs used by firm i , respectively.

Xi = [Z ρi +M

ρi ]

1ρ


Intermediate Goods

Zi and Mi are the bundles of domestic and importedintermediate inputs used by firm i , respectively.

Xi = [Z ρi +M

ρi ]

1ρ

where

Zi =

[∫

zθijdj

]1θ

Mi =

[∫

Ωi

(bmik)θdk

]1θ

b ≥ 1 is the quality attached to imported inputs.


Sales and Fixed Costs of Importing and Exporting

gi is the domestic sales while g∗i is the exports.

Yi = gi + g∗i


Sales and Fixed Costs of Importing and Exporting

gi is the domestic sales while g∗i is the exports.

Yi = gi + g∗i

Three kinds of fixed costs: fe , fI , and fυ.

F (|Ωi |, g∗i ) = [fI1|Ωi |6=0 + fυ|Ωi |

λ + fe1|g∗

i|>0]

where λ > 1.


Input Prices

PXi=

(

Pρ

ρ−1

Z + Pρ

ρ−1

Mi

)ρ−1ρ

if firm i imports

PZ if firm i does not import


Input Prices

PXi=

(

Pρ

ρ−1

Z + Pρ

ρ−1

Mi

)ρ−1ρ

if firm i imports

PZ if firm i does not import

PMi=

[∫

k∈Ωi

(pm

b)

θθ−1dk

]θ−1θ

=pm

b|Ωi |

θ−1θ

where 0 < θ < 1.


Firm’s Problem

Unit cost of production for firm i is

Ci =1

µµ(1− µ)1−µ

w1−µPµXi

Ai

.


Firm’s Problem

Unit cost of production for firm i is

Ci =1

µµ(1− µ)1−µ

w1−µPµXi

Ai

.

mi =

(

pmPMi

)1

θ−1(

PMi

PXi

)1

ρ−1Xi if firm i imports

0 if firm i does not import


Firm’s Problem Cont...

Firm i receives demand shock si in the foreign market.

g∗i (si , pi ) =

sip1

ǫ−1

i if firm i exports0 if firm i does not export




g∗i (si , pi ) =

sip1

ǫ−1


pi =

Ci

ǫin the domestic market

τ Ci

ǫin the foreign market




g∗i (si , pi ) =

sip1

ǫ−1


pi =

Ci

ǫin the domestic market

τ Ci

ǫin the foreign market

Firm has to decide about being an exporter and an importer,as well as, the number of varieties to import.

Ψ = maxΩi ,gi ,g

∗

i

Πi − wF (|Ωi |, g∗i )


F.O.C.

∂Ψ

∂Ω= W (1− ε)(1 + I (g∗ > 0)sτ

εε−1 )

∂p(Ω)ε

ε−1

∂Ω− λwfνΩ

λ−1 = 0


F.O.C.

∂Ψ

∂Ω= W (1− ε)(1 + I (g∗ > 0)sτ

εε−1 )

∂p(Ω)ε

ε−1

∂Ω− λwfνΩ

λ−1 = 0

=⇒ κµε

ε− 1

θ − 1

θ

(pm

b

)ρ

ρ−1P

µεε−1

+ ρ1−ρ

X = λwfνΩλ− θ−1

θρ

ρ−1

where

κ = W (1− ε)(1 + I (g∗ > 0)sτε

ε−1 )εε

1−ε

(

w1−µ

Aµµ(1−µ)1−µ

)ε

ε−1.


Some Discussions

Relative expenditures on imported and domestic intermediateinputs

Em

EZ

=(pm)

ρρ−1 (b)

1θ−1

− 1ρ−1

(PZ )ρ

ρ−1

Ωθ−1θ

ρρ−1

Responses

∂(Em/EZ )

∂Ω> 0,

∂(Em/EZ )

∂pm< 0,

∂(Em/EZ )

∂PZ

> 0


Calibration

Each firm is a tuple of shocks (Ai , si )

Targeting moments from the data calibrate the vector ofparameters Θ.

Θ = θ, ρ, b, µ, λ, fe , fυ, fI , τ,w , pm, σs , corr ,W ,PZ , ǫ


Simulation Parameters

Param. Val. Desc.

θ 0.67 elasticity of substitution within intermediate input groupsρ 0.52 elasticity of substitution between intermediate input groupsb 2 quality attached to imported intermediate varietiesµ 2/3 cost share of intermediate inputsλ 2.33 curvature of the convex adjustment costfe 0.3 entry cost for the export marketfv 0.0003 scale parameter for the adjustment costfI 0.0001 entry cost for the import marketτ 1.2 iceberg costw 60 wagepm 20 unit price of imported intermediate varietiesσ 0.5 std. dev. for the demand shockscorr 0.8 correlation between the demand and productivity shocksW 1000 demand shifterPZ 2 price of the domestically produced intermediate inputsǫ 0.75 elasticity of substitution between intermediate input groups


Export Decisions

5

10

15

20

25

30

35 1020

3040

5060

7080

0

0.2

0.4

0.6

0.8

1

s

Exports Decisons over the State Space

A

Exp

ort D

ecis

ion


Import Decisions

510

1520

2530

35

20

40

60

80

0

0.2

0.4

0.6

0.8

1

A

Import Decisons over the State Space

s

Impo

rt D

ecis

ion


Model Fit

Figure : Intermediate Import Ratios, Exporters

0 10 20 30 40 50 60 70 80 90 1000

0.1

0.2

0.3

0.4

0.5

0.6

0.7

Size Percentile

Ave

rage

Inte

rmed

iate

Impo

rt R

atio

DataModel


Model Fit

Figure : Intermediate Import Ratios, Non-Exporters

0 10 20 30 40 50 60 70 80 90 1000

0.02

0.04

0.06

0.08

0.1

0.12

Size Percentile

Ave

rage

Inte

rmed

iate

Impo

rt R

atio

DataModel


Model Fit

Figure : Average Number of Imported Varieties by Firm Size, Exporters

0 10 20 30 40 50 60 70 80 90 1000

20

40

60

80

100

120

140

160

Size Percentile

Ave

rage

Num

ber

of Im

port

ed V

arie

ties

DataModel


Model Fit

Figure : Average Number of Imported Varieties by Firm Size,Non-Exporters

0 10 20 30 40 50 60 70 80 90 1000

2

4

6

8

10

12

14

16

18

Size Percentile

Ave

rage

Num

ber

of Im

port

ed V

arie

ties

DataModel


Model Fit

Figure : Number of Imported Varieties by the Fraction of Firms - Data

10−5

10−4

10−3

10−2

10−1

100

101

102

103

104

Actual Data

Fraction of Firms

Num

ber

of Im

port

ed V

arie

ties


Model Fit

Figure : Number of Imported Varieties by the Fraction of Firms - Model

10−4

10−3

10−2

10−1

100

100

101

102

103

Model

Fraction of Firms

Num

ber

of Im

port

ed V

arie

ties


Revenue Decomposition

0 200 400 600 800 1000 1200 1400 1600 1800 20000

0.5

1S

hare

in R

even

ueRevenue and Its Decomposition across Markets (Ranked by Revenue Size)

Firms

0 200 400 600 800 1000 1200 1400 1600 1800 2000−20

0

20

Log(

Rev

enue

)

Export RevenueDomestic Revenuelog(Revenue)


The Impact of Imported Intermediate Varieties on Revenue

0 200 400 600 800 1000 1200 1400 1600 1800 2000−15

−10

−5

0

5

10

15

Firms

Log(

Rev

enue

)

The Impact of Imported Intermediate Varieties on Revenue

Importing not AllowedImporting Allowed


How Sizeable are the Trade Costs?

Table : Sunk and Fixed Costs of Trade

tau f e f I f v lambda F e/R F v/R T/R1.2 0.3 0.0001 0.0003 2.33 0.000175 0.1928 0.14521.08 0.3 0.0001 0.0003 2.33 0.007794 0.07472 0.04541.2 0.27 0.0001 0.0003 2.33 0.000164 0.1928 0.14521.2 0.3 0.00009 0.0003 2.33 0.000175 0.1928 0.14521.2 0.3 0.0001 0.00027 2.33 0.000163 0.19902 0.14521.2 0.3 0.0001 0.0003 2.1 0.007825 0.053921 0.14Notes: This table shows the magnitudes of trade-related costs where Fe =∑

iI(Ei = 1)wfe , FI =∑

iI(Ii = 1)wfI , Fυ =∑

iI(Ii = 1)wfυ |Ωi |λ, T =∑

i (τ − 1)pig∗

i , R =∑

ipiYi


Next Step and Further Research

Counterfactual experiments regarding cost items fe , fI , fυ, τand input prices

Behavioral transitions of firms in response some costalleviations

Level effects of alleviating some fixed or sunk cost elements


Next Step and Further Research

Counterfactual experiments regarding cost items fe , fI , fυ, τand input prices

Behavioral transitions of firms in response some costalleviations

Level effects of alleviating some fixed or sunk cost elements

Further Research

Getting closer to a general equilibrium analysis

Studying the nature of the adjustment costs


Conclusion

How the import and export decision interact with each other?


Conclusion


The impact of imported intermediates on economic activity


Conclusion



Quantification of the trade costs


Conclusion





Conclusion




Policy suggestions


Thank You.

Documents

Intermediate Inputs, Firm Size, and Import Content of ... · Preliminaries Extend Gopinath and Neiman (2014) by adding exports market and demand shocks Two countries: home and foreign