Indian buyers in global markets: Quality, prices and productivity

Abstract

AbstractThis paper adds to the new literature on firms' direct sourcing of imported intermediate inputs. We address key gaps in the literature by examining the influence of source country characteristics on import prices, the import behaviour of Indian firms and empirical strategies to address source country selection bias, while using disaggregated import data at the firm, product and source country level. We offer a theoretical contribution which suggests that source characteristics affect firms' willingness to pay for imported inputs, particularly high‐quality differentiated inputs. Our unique and detailed data set of Indian manufacturers' imported inputs allows us to control for all firm and product characteristics to eliminate missing‐variable bias with fixed effects, and to correct for possible selection bias in firms' source country choices. Results indicate that source country characteristics matter. Import prices rise for products sourced from high‐income per capita countries, rise with distance and fall with GDP and remoteness (the latter a new finding suggested by our theory). High productivity firms that also export appear particularly willing to pay high prices for high‐quality inputs from specific source countries. Our results suggest that, apart from other consequences, restrictions on imported inputs harm firms' ability to upgrade product quality.