What is the effect of imports on productivity? To answer this
question, we estimate a structural model of producers using
product-level import data for a panel of Hungarian manufacturing
firms from 1992 to 2001. In our model with heterogenous firms,
producers choose to import or purchase domestically varieties of
intermediate inputs. Imports affect firm productivity through
expanding variety as well as improved input quality. The model leads
to a production function where the total factor productivity of a
firm depends on the share of inputs imported. To estimate this
import-augmented production function, we extend the Olley and Pakes
(1996) procedure for a setting with an additional state variable,
the number of input varieties imported. Our results suggest that the
role of imports is both statistically and economically significant.
Imports are responsible for 30% of the growth in aggregate total
factor productivity in Hungary during the 1990s. About 50% of this
effect is through imports advancing firm level productivity, while
the remaining 50% comes from the reallocation of capital and labor
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