The Comparative Advantage of Firms

John Morrow, Johannes Boehm and Swati Dhingra

No 13699, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Multiproduct firms dominate production, and their product turnover contributes substantially to aggregate growth. Theories propose that multiproduct firms grow by diversifying into products which need the same know-how or capabilities, but are less clear on what these capabilities are. Input-output tables show firms co-produce in industries that share intermediate inputs, suggesting input capabilities drive multiproduct production patterns. We provide evidence for this in Indian manufacturing: the similarity of a firm's input mix to an industry's input mix predicts entry into that industry. We identify the direction of causality from the removal of size-based entry barriers in input markets which made firms more likely to enter industries that were similar in input use to their initial input mix. We rationalize this finding with a model of industry choice and economies of scope to estimate the importance of input capabilities in determining comparative advantage. Complementarities driven by input capabilities make a firm on average 5% (and up to 15%) more likely to produce in an industry. Entry barriers in input markets constrained the comparative advantage of firms and were equivalent to a 10.5 percentage point tariff on inputs.

Keywords: Multiproduct firms; Firm capabilities; Vertical input linkages; Comparative advantage; Economies of scope; Size-based policies (search for similar items in EconPapers)
JEL-codes: F11 L25 M2 O3 (search for similar items in EconPapers)
Date: 2019-04
New Economics Papers: this item is included in nep-bec, nep-com, nep-int and nep-tid
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
https://cepr.org/publications/DP13699 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: The Comparative Advantage of Firms (2022)
Working Paper: The comparative advantage of firms (2022)
Working Paper: The Comparative Advantage of Firms (2021)
Working Paper: The Comparative Advantage of Firms (2021)
Working Paper: The comparative advantage of firms (2019)
Working Paper: The comparative advantage of firms (2019)
Working Paper: The Comparative Advantage of Firms (2019)
Working Paper: The Comparative Advantage of Firms (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:13699

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP13699

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().