Importing, Exporting, and Innovation in Developing Countries

This study shows the persistent differences in evolution of firms when they are grouped according to their trade orientation as: two-way traders (both importing and exporting), exporters-only, importers-only, and nontraders. Extending the existing models of firm evolution into an open economy setup by incorporating the importing decision, a simple model is presented and it is empirically shown that: (i) globally engaged firms are larger, more productive, and grow faster than nontraders; (ii) two-way traders are the fastest growing and most innovative group who are followed by exporter-only firms; and (iii) estimating the export premium without controlling for import status is likely to overestimate the actual value by capturing the import premium. Robustness of the results is shown by providing evidence from the panel data constructed from the original dataset and controlling for variables that are likely to affect firm evolution.