UC Davis

Investment in capital goods is a key determinant of productivity and economic growth. At the same time, machinery production is more geographically concentrated than other manufactured goods and strongly correlated to the R&D intensity across countries. Therefore, international trade in capital goods is expected to increase countries' access to different technologies and to have a growth effect beyond the traditional allocative efficiency trade gains. This dissertation focuses on the effects from capital goods trade policy on firms performance, welfare and technology diffusion. The first chapter investigates the effect of a reduction in capital goods import tariff on firms' trade performance. To do so, I bring together rich data from Brazilian firms that imported capital goods in the last two decades. The empirical strategy compares the share of imports across firms that entered through a tariff exemption program and the firms' outcomes in the following years, using local projections estimates. The results point to a larger increase in exports, imports of inputs, number of destination countries and of export varieties for firms with larger shares of exempted capital goods imports. In order to address potential selection effect from program participation, I take a sub-sample of non-applicant firms, since the exemption, once approved, applies to all firms. I find very similar results. Regressions which instrument for the equipment imports further confirm the findings. Chapter 2 studies the welfare effects of capital goods trade policy, using a quantitative general equilibrium framework with sector-specific trade elasticities and capital and intermediate inputs shares. I present an empirical implementation of the model and conduct counterfactual analyses regarding the capital equipment liberalization program in Brazil, employing data on world input-output flows and on the Brazilian sector-level labor. I first assess the welfare effects of gradual reductions in import tariffs up to complete liberalization. The results suggest welfare gains of up to 2%. Then I compare the impact from unilateral tariff reductions, and find that equipment imports from China would benefit Brazil the most. Finally, further removing trade costs leads to an even stronger increase in welfare. While the first two essays focus on tariff policy, the third part of the dissertation explores foreign capital policy in the context of the diffusion of technologies embodied in capital goods. Chapter 3 studies technology diffusion and multinational spillovers by taking advantage of the trade in capital goods dataset that contains narrowly defined products, different from the previous literature. This allows me to identify the first firm to adopt a technology and to track subsequent adoptions. I find evidence of important spillovers from multinationals: they are importers of new technology, later followed by other firms, relatively more often than domestic firms. I also show that equipment of higher value, imported by multinationals and by larger firms, take longer to be diffused. Finally, I report that first adopters experience a very large increase in their export growth following the investment in capital (23 percentage points), while follower firms can still get a nontrivial benefit from the import too (6 percentage points). The gains for followers of multinationals are higher (10.7 percentage points) than the average of followers. These findings have important implications for foreign capital policy.