Imported Intermediates and Productivity: Does Absorptive Capacity Matter? A Firm-Level Analysis for Uruguay

International trade is considered a vehicle for technology diffusion, which in turn can induce productivity growth. Particularly, trade may give domestic firms access to a larger variety and/or better quality of intermediate or capital inputs in which new technologies are embodied. However, the lack of sufficiently skilled labour, an issue especially relevant for small developing countries, may prevent firms from taking advantage of these technologies. Using a panel of Uruguayan manufacturing firms covering the period 1997-2008, we explore the impact of imported inputs on firms’ productivity and evaluate whether the effect is mediated by the firm’s absorptive capacity (proxied by the proportion of skilled labour). We apply an indirect (two-stage) approach by first estimating firms’ productivity and then using impact evaluation techniques to analyze causality between imported inputs and productivity. Our results show that imported intermediates have an enhancing effect on Uruguayan firms’ productivity and absorptive capacity plays a role on this effect.