Imported Intermediates and Firm Performance: An empirical analysis using micro data from Japanese manufacturers

Market openness improves the efficiency of business operations through various channels, and firms’ usage of imported intermediate goods is one of such conduits. This paper empirically examines the effects of import of intermediates on Japanese manufacturers’ productivity and profitability by using firm-level data from the Basic Survey of Business Structure and Activities. We find that (i) productive firms tend to import intermediates; (ii) however, the dependency on imported intermediates decreases as firm productivity increases; (iii) firms with high exports/output ratios, foreign enterprises’ investments, or foreign affiliates tend to import intermediates; (iv) firms with high productivity, high exports/output ratios, or foreign enterprises’ investments tend to be more profitable; and (v) arm’s-length import of intermediates is positively correlated to firm profitability, whereas import of intermediates from foreign affiliates (i.e., in-house import) is negatively correlated. These findings imply that Japanese firms have room to improve productivity and profitability by increasing imports of intermediate goods and that inducing small and medium-sized enterprises unfamiliar to foreign intermediates to import and use them will be significant through policy support such as information dissemination and human resource training.