Publication: Inventories, Input Costs, and Productivity Gains from Trade Liberalizations
Date
2021-03
ISSN
Published
2021-03
Author(s)
Khan, Shafaat Yar
Khederlarian, Armen
Abstract
Sourcing internationally entails
additional costs due to larger per inventory holdings. When
firms switch toward foreign sources, these unobserved costs
increase. This paper revisits the effect of trade
liberalization on firms’ productivity taking into account
the inventory premium of importing and input cost
heterogeneity. Through model simulations, the paper shows
that in the presence of inventory holding costs, their
omission in revenue-based productivity measures leads to a
systematic overestimation of the elasticity of productivity
to input tariffs. Controlling for the firm’s import
intensity and inventory usage in the estimation of
productivity corrects for the bias. The paper studies the
relevance of this potential bias during India’s trade
liberalization in the early 1990s. First, it documents that
inventory holdings of intermediate goods increased
significantly with import intensity and input tariffs.
Second, it extends a standard productivity estimation
procedure with a control function of the various firm-level
input costs. The mismeasurement channel accounts for around
35 percent of the estimated productivity gains. Consistent
with the gradual adjustment to the tariff reductions, the
bias in the response of firm-level productivity is backloaded.
Citation
“Khan, Shafaat Yar; Khederlarian, Armen. 2021. Inventories, Input Costs, and Productivity Gains from Trade Liberalizations. Policy Research Working Paper;No. 9564. © World Bank, Washington, DC. http://openknowledge.worldbank.org/handle/10986/35213 License: CC BY 3.0 IGO.”
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