The importance of productivity growth as a primary determinant of the underlying difference in income across countries is now a well-established empirical proposition (Hall and Jones 1999). Endogenous growth theory suggests that innovation is the main source of productivity growth (Grossman and Helpman 1991). However, the creation of new products and technologies is concentrated mostly in developed countries (Eaton and Kortum 2001). Developing countries rely much more on technology and knowledge produced by high-income countries than on direct investment in research and development. Therefore, a crucial question for developing economies is whether, how, and to what extent importing foreign technology can enhance the productivity of their firms to narrow the income gap between themselves and more developed countries.
In this article, we examine the productive impact of imported capital input by emphasizing its interaction with the absorptive capacity of manufacturing firms. The importing of foreign capital input, embodied by technology and knowledge, has been recognized in the economics literature as a significant conduit for technology transfer across countries (Coe and Helpman 1995; Eaton and Kortum 1996, 1999, 2001; Grossman and Helpman 1991; Xu and Wang 1999). (1) Coe and Helpman (1995), for example, find a significant impact on productivity at the country level from importing intermediate products and capital inputs, and Keller (2002a, 2002b) supports this finding with industry-level data. In studies at the firm level, it was observed that the productive impact of the imported capital input varies across countries in terms of both statistical significance and magnitude; in some countries it is strong, whereas in others it is weak or statistically insignificant. Kraay, Soloaga, and Tybout (2001), Keller and Yeaple (2003), and Vogel and Wagner (2008) find weak evidence of productivity effects of importing at the firm level, but Amiti and Konings (2007), Fernandes (2007), Gorg and Hanley (2005), Gorg, Hanley, and Strobl (2008), Halpern, Koren, and Szeidl (2006), Jabbour (2007), Kasahara and Rodrigue (2008), Lopez (2006), Lopez and Yadav (2009), and Yasar and Paul (2007) find statistically significant but highly varying effects. (2) These differences may stern in part from the fact that at different stages of development, countries have differences in some firm characteristics that help create mechanisms through which productivity gains are realized. This calls for further study of the productive contribution of imported capital input in various countries, at different stages of development, by emphasizing its linkages with firm characteristics such as input composition, skill intensity, or absorptive capacity.
The productive effects of importing can be examined using standard least-squares techniques by including a dummy variable to indicate the import of intermediate inputs in a production function or a productivity equation. Such a method, however, assumes homogeneity in the productive impact of the imported capital across firms by imposing a linearity restriction on the outcome equation. It is expected that importing capital from countries with higher levels of accumulated technical knowledge will improve the productivity of firms in the developing host country through R&D embodied in the capital and associated learning. (3) However, a shortage of absorptive capacity could potentially limit firms' ability to utilize these new technologies effectively. (4) The relationship may not be linear as the degree to which knowledge spillovers can be effectively utilized in the host country will depend on the skill intensity or absorptive capability (5) of firms in the host country, as well as some other firm, industry, or country characteristics. (6) Nelson and Phelps (1966) emphasize the importance of absorptive capability: "We suggest that, in a technologically progressive or dynamic economy, production management is a function requiring adaptation to change and that the more educated a manager is, the quicker will he be to introduce new techniques of production. …