Working Paper: CEPR ID: DP13699
Authors: Johannes Boehm; Swati Dhingra; John Morrow
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
JEL Codes: F11; L25; M2; O3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Removal of size-based entry barriers (L11) | Better access to inputs (C67) |
| Better access to inputs (C67) | Increased likelihood of diversifying into similar industries (L19) |
| Firm's input mix similarity to an industry's input mix (L23) | Positive prediction of entry into that industry (L26) |
| Removal of size-based entry barriers (L11) | Increased likelihood of firms entering similar industries (L19) |
| Entry barriers in input markets (L13) | Constrained firms' comparative advantage (D22) |