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There are two ways trade improves productivity in manufacturing supply chains: First, when domestic producers of intermediate goods in the middle of a supply chain face increased competition from imported components that are cheaper or better-quality, the least efficient firms either drop away or switch industries while the more efficient firms innovate to remain on par or ahead of the competition. Second, domestic producers that make final goods at the end of the supply chain now have cheaper or better-quality inputs. By aggregating these incremental efficiencies along the supply chain, productivity grows.
Such has been the case in Vietnam’s manufacturing industries, as pointed out in a working paper from economists at the United Nations University in Finland. They analyzed data from more than 20,000 Vietnamese firms across the manufacturing supply chain from 2008 to 2013. By aggregating productivity effects along supply chains, they estimate that a 1 percent increase in imports boosts Vietnamese manufacturing productivity by 0.5 percent.