Abstract: Imports in developing economies can be the primary source of adoption of new technologies and modern production equipment. Distance plays an important mediating role because firms, especially in smaller cities, learn mostly from neighbouring peers. We also found that even within the type of imported machine, the source country of the product matters a lot. Finally, the extent of spillover effects was found to vary greatly concerning the importing firm as well as the composition of peers.
Large, foreign-owned, and internationalised firms, Manufacturing Companies in India are the ones that benefit from having importing firms in their vicinity, while small and domestically owned firms may be adversely affected by peer effects. Our results can be indicative for policymakers who are interested in the indirect effects of technology upgrading subsidy programs.
We found that such indirect effects exist. However, they are focused on interactions between large and huge firms. Since small-sized firms producing for the domestic market do not benefit much from import spillovers, policies aimed at helping such firms may not rely on these indirect effects.
1 Introduction
Capital goods, machines, and manufacturing technologies are produced in a few developed economies. Countries that participate in developing these technologies may benefit from them through knowledge spillovers as suggested by endogenous growth theories that highlight the exogenous nature of technology (see Romer 1990; Rivera-Baits and Romer 1991).
For developing countries, which do not produce manufacturing technology themselves, a major vehicle for spillovers and growth is imports. Indeed, Coe and Helpmann (1995), and Acharya and Keller (2009) have found large spillover effects on domestic productivity at the aggregate and sector levels from imports from foreign, R&D-rich countries. Importing the technology embedded in machines, and materials also boosts productivity at the firm level.
This paper considers how accumulated knowledge about machine imports affects new adoption and analyzes the channels of this spillover. Focusing on machine imports allows a better understanding of the potential source of productivity gains and growth. In particular, we examine how investment in a particular machine can be stimulated by prior imports of the same machine by local firms. As more and more local firms have imported a particular machine, the easier it is for other firms to acquire information about the benefits and nuances of the technology.
Moreover, if the machine is available from multiple countries, firms learn whether it is worthwhile to replace a machine from one country with a machine from another. If these learning channels are operating, we predict that in the absence of peers a firm will be less inclined to import a given machine or it will import it much later.
To answer these questions, we compile a dataset that matches machine-level import observations of Hungarian manufacturing firms for 1992–2003. This period offers several advantages. It starts with Hungary's early transition years, before which foreign machines were generally not available to domestic firms. Presumably, every machine imported in the early 1990s could be considered technologically more modern and more advanced than previously installed machines.
Furthermore, the transition invited waves of foreign direct investment, which introduced new imported machines and technology in many sectors. This is true not only for green-field investments but also for a portion of privatized firms where firms upgraded their production facilities through imports
Our results show that the presence of a previous importer of a specific machine in the nearby region increases the probability of a firm importing the same machine. The presence of such peers within 1 km of a firm increases the probability of import by 0.3 percentage points.
This effect decreases with the distance to the peers and increases as the number of peers increases. Having an additional peer within 1 km of the firm increases the probability of importing the same machine by 0.27 percentage points. Compared to the baseline probability of machine import, the presence of peers represents a 26% increase.
We also investigate how the decision about the country from which the chosen machine is to be imported is affected by the presence of a peer. The results show that if there is a nearby firm that has already imported a machine from the same country, the firm is 0.6 percentage points more likely to import a particular machine from that country.
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