Input Quality Upgrading from Tariff Reduction and Firm Productivity: Evidence from Ethiopian Manufacturing

Using a panel of firms from Ethiopian manufacturing census covering the period 2000–2016, this paper investigates how openness to trade help firms' input quality upgrading which further contribute to productivity gains. We estimate the quality of imported inputs at the firm level, and firm-level productivity using the Levinsohn and Petrin method. Then we estimate the effect of input tariff cut on input quality and further measure how input quality through input tariff reduction affect firms' productivity at different stages of regression. Our results suggest that input tariff reduction is associated with firms’ input quality upgrading and further with improvement in firms’ productivity.The effect of tariff cut is more pronounced for input-importing firms, and our result implies that the effect of input tariff cut motivates firms to participate in foreign input markets and helps upgrading input quality, thus contributing to firm productivity. Hence, further input trade liberalization measures should be designed to help key strategic manufacturing sectors. Besides, strategies have to be put in place to integrate the manufacturing sector into the global supply chain to reap more productivity gains. JEL Codes: D22 D24 F13 H32 L15 L23