this link to be in place can be many. Firstly, it can be that having already a contact with a
foreign supplier (or a foreign buyer) favors entry in export market (or the knowledge of
available foreign inputs). But beside this information issue there can also be a quality
issue. For example, as pointed out by Kraay et al (2001), exporters are relatively likely
to use imported capital and intermediate goods because they are granted preferential
access to foreign exchange, or because in order to satisfy demanding foreign buyers
they need to import high quality inputs that are not domestically available. Similarly
input and capital good requirements may accompany licensing agreements. This can
likely happen when firms are involved in international production networks importing
intermediate goods that need to be first reprocessed and then re-exported. Given the
information available in the data set we cannot detangle this issue, though we are
interested in exploring the extent of involvement of Indian firms in foreign networks21
and the relationship with their performance.
4. Foreign networks
Once established that import and export decisions are correlated, we now focus
on the measurement of the involvement of Indian firms in foreign networks. For this we
construct and index that accounts for both import and export intensities.
The main reference is the “Vertical Specialization” index proposed by Hummels, Ishii
and Yi (2001) as measure of foreign valued added embodied in exports. This index is
constructed multiplying the export share by the value of imported intermediates.
Consequently, the firm level approximation of this index will be, for the firm i at time t:
VSit =
Imported Intermediates it ɔ
Sales..
к it √
Exportsit =
f Exports it ï
Sales .t
к it √
• Imported Intermediates it
(4)
If the firm does not use imported inputs or it does not export, the index will be zero.
But for this version of the index22 there is not a definite upper bound and its value
can be highly influenced by the size of the firm: large firms that would import even a
small quota of inputs would exhibit an high value of the index. For this reason we
21 Identified both trough backward and forward foreign linkages.
22 In their paper Hummels, Ishii and Yi choose a sectoral normalization.
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