Static and dynamic gains from costly importing of intermediate inputs: Evidence from Colombia

This paper investigates the long-term effect of importing intermediate inputs on firm revenue and productivity, by estimating a dynamic model of firms' endogenous importing decisions with random sunk and fixed costs of importing. Based on counterfactual analysis, the model decomposes the gains from importing into a static revenue effect, resulting from improved quality and variety of available inputs, and a dynamic productivity effect, resulting from improved productivity. Empirical results from a Colombian plant-level dataset show that both the static and dynamic effects are important sources of gains from importing. It is also shown that the two types of trade liberalization, either by reducing the import tariff or by reducing sunk and fixed costs of import, both have a substantial impact on firm value.