Essay: International trade and trade policy may increase growth rates of income

There has been a recent growth of the amount of articles written on this topic; that international trade and trade policy may increase growth rates of income. Many researchers have provided a variety of frameworks for an open economy that are rooted in the closed economy endogenous growth models of Romer(1986) and Lucas(1988). One of the key lessons from this branch of literature is that imports of foreign inputs are an important determinant of the link between trade and growth. Grossman and Helpman(1991), Rivera-Bath and Romer(1991), and Quah and Rauch(199O) show that international trade can increase the growth rate by providing a wider range of intermediate inputs, which in turn facilitates more research and development or learning-by-doing activities. Thus, this literature seems to provide a theoretical foundation for the long-held conviction among development economists that international trade, by providing essential and efficient foreign inputs for industrializing sector, is an important factor of economic growth. Anne Kruger(1983, p.9), for example points out “a reduction in capital goods imports would reduce the GDP growth rate and a reduction of intermediate goods and raw material imports would adversely affect output and employment.”
There are several studies which address specifically the potential impact of imports on firm productivity. Analyzing Colombian firms, Fernandes (2003) finds that import penetration of intermediate goods has a large, positive, and significant impact on plant productivity. Results show that a 1 percent increase in import penetration increases plant productivity by 0.6 percent.

Kasahara & Rodriguez (2004) find equally significant results when observing Chilean plants, though with less magnitude; a 1 percent increase in the share of imports increased productivity between 0.14 and 0.20 percent. In contrast, an analysis of US multinationals by Keller & Yeaple (2003) concludes that imports do not influence plant productivity after controlling for endogeneity.

Muendler (2004) is closest to our work. In his study of trade liberalization and the productivity of Brazilian plants, he 8 considers two potential effects of imports. The first is the direct effect of imports on importers and, like Keller & Yeaple (2003), he finds no impact on productivity. The second is the threat of and the effective penetration of imported intermediate goods, both of which cause domestic intermediate goods producers to increase productivity.

First, a change in productivity occurs only if the imported intermediate good can be obtained for less than the full value of the new technology embodied in it. Since they are of superior quality, one would expect that the foreign engine block and foreign leather cost more than local substitutes. Productivity thus rises only if this increase in cost is less than the benefit it generates for the buyer.

Second, even if learning occurs, econometric measurement is difficult because of endogeneity problems. The decision to import is likely contemporaneous with unobserved (to the econometrician) positive productivity shocks, a problem that existing work has tried to alleviate (e.g., Keller & Yeaple, 2003, and Muendler, 2004).

These difficulties discouraged us from examining the direct effect of imports on the importers and suggested focusing on an alterative mechanism for learning from imports. The second mechanism for learning from importing is exposure to foreign technology. An original design invented in a particular region is learned elsewhere, for example, by reading a patent, reverse engineering a product, or licensing a technology. Learning the new design raises productivity by increasing the firm’s technological expertise. This mechanism is easy to operationalize and test at the aggregate economy level (see Connolly, 2001 and Rivera-Batiz & Romer, 1991). But, econometric identification of the phenomenon at the firm level requires careful consideration of how the learning occurs.
The research methodology chosen for this article is choosing and analyzing a case study. Its role is to emphasize detailed contextual analysis of the example chosen and to emphasize key aspects. Researchers have used this method for many years in numerous disciplines.

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