We estimate a model of importers in Hungarian microdata and conduct counterfactual
analysis to investigate the effect of imported inputs on productivity. We find that
importing all input varieties would increase a firm’s revenue productivity by 22 percent,
about one-half of which is due to imperfect substitution between foreign and domestic
inputs. Foreign firms use imports more effectively and pay lower fixed import costs.
We attribute one-quarter of Hungarian productivity growth during the 1993–2002 period
to imported inputs. Simulations show that the productivity gain from a tariff cut
is larger when the economy has many importers and many foreign firms. (JEL D24, F13,
F14, L60)
