Machinery Imports for Export Competitiveness

We analyse the relationship between export competitiveness and investment in machinery, allowing for imperfect substitution between domestically produced and imported machinery. A translog export price function is estimated for developed, export-oriented developing, and import-substituting developing countries in a panel data setting. Between 1967 and 1990, imported machinery helped lower export prices for export-oriented developing countries. Throughout, imported machinery was not a substitute for domestic machinery. Import-substituting developing countries were unable to harness imported machinery to reduce costs in the early years, though from about the early 1980s, with an opening up of their trade regimes, they were also able to benefit from the cost-reducing effect. Our results also imply that innovative effort based on imported technologies can be a precursor to the development of domestic innovation capabilities, which may ultimately become the main nexus of a country's innovation efforts