Effects of Imported Inputs on Export Sophistication: Evidence from Chinese Manufacturing Firms

This study investigates the distinct effects of imported intermediate and capital goods on manufacturing firms’ overall and domestic sophistication. We use the plausible exogenous tariff reductions caused by China’s accession to the World Trade Organization to construct firm-level instrumental variables for the import intensity of intermediate and capital goods. Empirical results demonstrate that imported intermediate goods increase firms’ overall sophistication, but decrease firms’ domestic sophistication. By contrast, imported capital goods increase overall and domestic sophistication. Mechanism tests reveal that imported intermediate and capital goods expand firms’ production scale. However, only capital goods have innovation induction and human capital complementary effects, while intermediate goods may substitute for human capital. This study has significant implications by revealing the existence of both complementary and substitution effects of imported inputs on China’s domestic technological upgrading.