Imported Intermediates, Absorptive Capacity and Productivity: Evidence from Ghanaian Manufacturing Firms

• Author: Harry Bloch,Mita Bhattacharya,Luke Emeka Okafor
• DOI: http://doi.org/10.1111/twec.12467
• Date: 01 February 2017
• Published date: 01 February 2017

Imported Intermediates, Absorptive

Capacity and Productivity: Evidence from

Ghanaian Manufacturing Firms

Luke Emeka Okafor

1

, Mita Bhattacharya

2

and Harry Bloch

3

1

School of Economics, University of Nottingham, Malaysia Campus, Jalan Broga, Malaysia,

2

Department of Economics, Monash University, Caulfield East, Vic., Australia and

3

School of Economics

and Finance, Curtin Business School, Perth, WA, Australia

1. INTRODUCTION

OVER the past three decades, the link between trade and growth has been a central

research topic in international trade. In recent years, a growing number of studies show

that an increasing share of international trade consists of intermediate inputs. Firms potentially

gain substantial benefits through access to imported intermediates, particularly higher-quality

inputs (Kugler and Verhoogen, 2009; Miroudot et al., 2009; Goldberg et al., 2010; Imbruno,

2015). While evidence on the growing share of trade in intermediates is well documented, its

role in improving international technology transfers and productivity across countries is not

well researched, particularly in the context of sub-Saharan Africa (SSA).

Trade in intermediates is one of the main channels for technology diffusion and a potential

source of enhancing firm productivity. High-tech inputs are an important source of research

and development (R&D) spillovers, particularly for firms operating in developing economies

(Xu and Wang, 1999; Madsen, 2007; Acharya and Keller, 2009). In most cases, firms

operating in developing economies depend heavily on imported technology from advanced

economies rather than investing in indigenous R&D (Eaton and Kortum, 2001; Kasahara and

Rodrigue, 2008; Acharya and Keller, 2009). The use of imported technology potentially pro-

vides an enabling environment for firms in developing countries to assimilate R&D spillovers.

Developing economies enhance growth using imported intermediates from countries that carry

out substantial R&D activities (Coe et al., 1997; Bell, 2007). Therefore, trade in intermediate

inputs has the potential to help firms in developing economies to narrow the productivity gap

with firms in advanced economies.

In view of the growing fragmentation of production, the question whether firms enhance

productivity from the use of imported intermediates or not is crucial in understanding the pat-

tern of international trade and its impact on productivity. The primary objective of this paper

is to analyse whether the productivity impact of imported intermediates depends on the

absorptive capacities of firms using firm-level panel manufacturing data from Ghana over the

period of 1991–2002. At the firm level, absorptive capacity (ABC) captures the ability to

identify, absorb and assimilate new external knowledge and advanced technologies over time.

The emerging evidence for the link between imported intermediates and productivity is

inconclusive. Some researchers report that imported intermediates have a negative impact on

productivity or are associated with negligible productivity gains (Biesebroeck, 2003;

This research is a substantially revised version of Chapter 2 of Okafor’s PhD dissertation titled ‘Essays

on International Activities of Firms, Innovation, and Financial Constraints’ completed at Monash Univer-

sity.

©2016 John Wiley & Sons Ltd 369

The World Economy (2017)

doi: 10.1111/twec.12467

The World Economy

Muendler, 2004). Contrary evidence suggests that imported intermediates improve productiv-

ity (Kasahara and Rodrigue, 2008; Goldberg et al., 2010; Yasar, 2013). Further, Amiti and

Konings (2007) establish that a reduction in input tariffs leads to productivity gains, particu-

larly for importing firms in Indonesia, while Halpern et al. (2011) find that firms that exclu-

sively use foreign input varieties in the production processes boost productivity by 12 per

cent in Hungary. Defever et al. (2012) show that official non-importing Chinese firms benefit

from input trade liberalisation by indirectly accessing foreign inputs from trade intermediaries.

The mixed findings from the literature can be due to the omitted variable bias, with variables

capturing ABC not having been included in most studies (Muendler, 2004; Kasahara and

Rodrigue, 2008).

1

Most studies that control for ABC tend to use measures, such as the proportion of skilled

workers (Augier et al., 2013; Yasar, 2013), or the relative total factor productivity (TFP) dif-

ference between a firm and an industry leader (Girma, 2005; Kim, 2015). For instance, using

a cross section of firms from African countries, Foster-McGregor et al. (2016) find that manu-

facturing firms with the highest levels of ABC as captured by share of white-collar workers in

total employment exhibit a robust link between importing and productivity. These commonly

used measures of ABC fail to capture dynamic elements of the relative improvement or dete-

rioration in a firm’s ability to assimilate external technologies.

There is now a substantial literature that treats firms as learning organisations, building on

the seminal work of Penrose (1995) in which management capacity expands over time with

the experience (learning) of the extant group of managers. In related work, Cohen and

Levinthal (1990) treat the ability of a firm to absorb external technology as a result of the

firm’s own experience in R&D. Importantly, the ABC of the firm develops alongside direct

investments in building ABC.

We utilise a measure of ABC that aims to capture its dynamic character. We take a firm’s

past productivity improvement or deterioration relative to the initial level of productivity to

indicate its ABC and measure this dynamic capability by the ratio of lagged productivity to

initial productivity (measured at the start of the sample period). We expect dynamic capability

to be particularly important in the context of a developing economy, where most firms typi-

cally operate well inside the technology frontier as determined by leading firms in the devel-

oped economies.

This study uses firm-level data from Ghanaian manufacturing firms. Ghana is an interesting

case study given its status as one of African’s most devout reformers. Ghana embarked on an

IMF-supported economic recovery programme in 1983, transforming from a tightly control led

trade regime to an open economy since 1986. The adoption of a new licensing system in

1986 allowed the purchase of non-consumer goods from abroad without restrictions (Barwa,

1995; Rodrik, 1999; Ackah et al., 2014).

In addition, Ghana introduced a number of policies in the 1990s aimed at facilitating the

purchase of foreign intermediate goods deemed essential for rapid industrialisation and

1

Further evidence is provided in a number of country-level studies. These studies examine whether high

productivity firms self-select into import markets and/or investigate the learning-by-importing hypothesis.

In general, these studies show that sourcing of inputs from abroad is associated with productivity

improvement. Countries studied are Belgium (Mu^

uls and Pisu, 2009), Germany (Vogel and Wagner,

2010), Italy (Castellani et al., 2010; Conti et al., 2013), Spain (Fari~

nas and Mart

ın-Marcos, 2010), Swe-

den (Andersson et al., 2008), Colombia (Kugler and Verhoogen, 2009), Indonesia (Blalock and Veloso,

2007) and India (Acharya and Keller, 2009; Goldberg et al., 2010; Topalova and Khandelwal, 2011).

©2016 John Wiley & Sons Ltd

370 L. E. OKAFOR, M. BHATTACHARYA AND H. BLOCH