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Input reallocation within firms

Author

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  • Hylke Vandenbussche
  • Christian Viegelahn
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.

Suggested Citation

  • Hylke Vandenbussche & Christian Viegelahn, 2016. "Input reallocation within firms," Working Papers of Department of Economics, Leuven 553943, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.
    • Handle: RePEc:ete:ceswps:553943
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    Cited by:

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    2. Russ, Katheryn N. & Swenson, Deborah L., 2019. "Trade Diversion and Trade Deficits: The Case of the Korea-U.S. Free Trade Agreement," Journal of the Japanese and International Economies, Elsevier, vol. 52(C), pages 22-31.
    3. Erbahar, Aksel & Zi, Yuan, 2017. "Cascading trade protection: Evidence from the US," Journal of International Economics, Elsevier, vol. 108(C), pages 274-299.
    4. Bown, Chad P. & Erbahar, Aksel & Zanardi, Maurizio, 2021. "Global value chains and the removal of trade protection," European Economic Review, Elsevier, vol. 140(C).
    5. Stefan KÜHN & Christian VIEGELAHN, 2019. "Foreign trade barriers and jobs in global supply chains," International Labour Review, International Labour Organization, vol. 158(1), pages 137-167, March.
    6. Chad Brown & Paola Conconi & Aksel Erbahar & Lorenzo Trimarchi, 2020. "Trade Protection Along Supply Chains," Working Papers ECARES 2020-52, ULB -- Universite Libre de Bruxelles.
    7. Stefan Kühn & Christian Viegelahn, 2017. "Foreign trade barriers and jobs in global supply chains," Working Papers 1705, Council on Economic Policies.

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    More about this item

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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