The role of imports for exporter performance in Peru

• Author: Thomas Farole,Ana Margarida Fernandes,Martha Denisse Pierola
• Date: 01 February 2018
• Published date: 01 February 2018
• DOI: http://doi.org/10.1111/twec.12524

ORIGINAL ARTICLE

The role of imports for exporter performance in Peru

Martha Denisse Pierola

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Ana Margarida Fernandes

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Thomas Farole

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Inter-American Development Bank, Washington, DC, USA

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Development Research Group, The World Bank, Washington, DC, USA

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The World Bank, Washington, DC, USA

Funding information

Financial support from Macro and Fiscal Management Global Practice, Latin America Region, is gratefully acknowledged.

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INTRODUCTION

Supported by the commodities boom and a raft of policy liberalisations, Peru experienced a decade

of unprecedented growth that contributed to substantial poverty reduction. Between 2000 and

2013, Peru’s GDP per capita grew at 4.3% annually, a rate almost three times faster than the global

average and six times faster than its average growth in the previous four decades. But as the com-

modity super-cycle unwinds, Peru faces a significant challenge of sustaining growth. Trade is one

potential growth engine that remains significantly under-exploited.

Even during the commodities boom, Peru exported far less than would be predicted by its income

level, and its import share of GDP (at 24.2%) was the 12th lowest in the world in 2013. Of course,

from a static growth accounting perspective, imports are a drain on growth. But with increasing con-

centration of non-commodity trade in global production networks or global value chains (GVCs)—

where stages of production are separated and dispersed across locations—the role of imported inputs

becomes crucial, both as a source of productivity-enhancing technology and as “ticket”to participa-

tion in GVCs. Peru remains a substantive laggard, with its participation in GVCs being highly con-

centrated in forward links to its commodity exports, with limited potential for productivity-enh ancing

spillovers. Importantly, Peru’s backward links in GVCs—the degree to which it makes use of

imported inputs in its export products—are among the lowest in the world. The share of foreign value

added embedded in Peru’s total exports stood at 14% in 2011, which is a much smaller percentage

than that of other developing countries deeply integrated in GVCs, such as Mexico and Malaysia.

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The share of foreign value added embedded in a country’s total exports indicates what part of the country’s gross exports

consists of inputs produced in foreign countries (and thus is the share of the country’s exports not adding to its gross

domestic product). It is shown in Figure A1 for Peru and several comparator countries, based on data from UNCTAD’s

Eora database. The database uses information from a multiregion input–output table at the world level to estimate the import

content ratio in exportable products and value added in trade for a large number of countries (UNCTAD, 2013). The data-

base is part of the research agenda focusing on the importance of trade in intermediates and on measuring trade in value

added whose important contributions are in Koopman, Whang, and Wei (2014) or Johnson and Noguera (2012). Note that

this measure of the share of foreign value added differs from the measure of direct imports of intermediates we will use for

the analysis in this paper (which is closer to the concept of “importing to export”proposed by Baldwin and Lopez-Gonzalez

(2015) measuring foreign intermediates used to produce goods and services that are subsequently exported).

DOI: 10.1111/twec.12524

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©2017 The World Bank The World Economy

©2017 John Wiley & Sons Ltd

wileyonlinelibrary.com/journal/twec World Econ. 2018;41:550–572.

Recognition of the importance of imported inputs for economic growth dates back to the

endogenous growth theory, where improvements in technology foster long-term growth and

imported inputs are a channel for the diffusion of global technology (Aghion & Howitt, 1998;

Grossman & Helpman, 1991; Romer, 1987; Romer, 1990).

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Gains to productivity also arise from

the increased input variety ensuing from the use of imported intermediate inputs, in the presence

of imperfect substitution in production across domestic and imported intermediate inputs (Ethier,

1982). Extending initial empirical evidence at the aggregate level that imports of intermediate

inputs are positively correlated with aggregate productivity by Coe, Helpman, and Hoffmaister

(1997), a growing set of micro-level studies show that manufacturing firms benefit from their

access to imported intermediate inputs in terms of significantly higher productivity (e.g., Amiti &

Konings, 2007; Castellani, Serti, & Tomasi, 2010; Halpern, Koren, & Szeidl, 2015; Kasahara &

Rodrigue, 2008) and higher overall product scope (Goldberg, Khandelwal, Pavcnik, & Topalova,

2010).

Since imported inputs enhance firm productivity, they can also play a critical role for firm

export performance. Specifically, selection into exporting determined by firm productivity as in

Melitz (2003) can be strengthened by the firm’s access to imported inputs as shown in the hetero-

geneous firms trade model proposed by Kasahara and Lapham (2013). In this model, importing a

larger variety of intermediate inputs increases firm productivity via an increasing returns technol-

ogy. More productive firms can afford to incur in the sunk costs required to export and still be

profitable and thus are more likely to export.

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Imported intermediate inputs are often—especially

for firms in developing countries—of higher quality than domestic inputs. Kugler and Verhoogen

(2012) propose a heterogeneous firms trade model where the use of higher-quality intermediate

inputs in production increases the quality of a firm’s output, leading to higher demand in export

markets (particularly those of high-income countries) and enhancing the firm’s likelihood of

exporting and its total exports.

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Access to lower-priced imported inputs would also reduce costs

and increase profits from exporting, allowing firms previously unable to export to now afford the

required fixed costs.

In this paper, we test the aforementioned predictions from the literature on the role of imported

inputs for the export performance of firms in Peru. The country’s last decade is a particularly inter-

esting context in which to test these predictions given weak productivity growth, declining perfor-

mance of the export engine and the apparent failure to exploit the import channel which

represented a barrier to firm-level productivity, export competitiveness and ultimately economic

growth. We use highly disaggregated exporter-level and importer-level customs data for Peru over

a long period, from 2000 to 2012, to evaluate the relationship between imported intermediate

inputs and export performance for the overall export sector as well as for two leading non-minerals

export sectors—agribusiness, where Peru has achieved a strong position in global retail supply

chains and apparel, one of Peru’s largest manufacturing export sectors and among the most impor-

tant sectors traded in GVCs. We estimate premia for exporting firms that are also direct importers

relative to those that are not direct importers in a wide range of firm export performance

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See Keller (2005) for a review of the literature on trade as a channel for the international transmission of technology.

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Bas and Strauss-Kahn (2014) extend a simpler version of the model by Kasahara and Lapham (2013) where they assume

that the use of imported intermediate inputs explicitly reduces the fixed costs of exporting (in addition to increasing produc-

tivity).

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Javorcik and Iacovone (2012) show that firms upgrade the quality of their products (as proxied by unit values) in prepara-

tion for entry into export markets. Hallak (2006) shows that consumers in higher-income countries are more willing to pay

for product quality, and Verhoogen (2008) proposes a model where firms choose to sell higher-quality varieties to richer

destination markets.

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