How easily firms substitute between domestic and foreign suppliers within an input is central to the propagation of foreign shocks. I provide novel plant-level estimates of the elasticity of substitution between domestic and foreign suppliers within narrowly defined inputs. Using rich Indian plant data that report input purchases separately by domestic and imported sources, I estimate an elasticity of 0.51, which implies complementarity between foreign and domestic sourcing. I provide evidence of aggregation bias in this elasticity. Aggregating the same data across plants to mimic national-level input-sourcing data yields much higher estimates, close to 2. I derive conditions under which ignoring firm heterogeneity can generate a positive aggregation bias in the elasticity and show that these conditions hold empirically in my setting. To quantify the aggregate importance of the estimated complementarity, I embed it in a general equilibrium model with product-level input-output linkages. A quantitative application of the model to the dollar shock induced by the 2013 Taper Tantrum shows that, relative to a substitutes benchmark, complementarity amplifies the negative GDP effect by an additional 12%, corresponding to $8.4 billion in additional losses. At the firm level, the additional negative effects from complementarity are strongest for firms that source from foreign and domestic suppliers in roughly equal proportions. Suppressing firm heterogeneity in import shares within inputs substantially amplifies the additional negative GDP impact under complementarity. Finally, whether complementarity amplifies or attenuates the effects of shocks to upstream sectors depends on the origin of the micro shock. 

We study how access to international markets shapes the local effects of external liberalization. Exploiting India’s 1990s liberalization that lowered prices in both manufacturing and agriculture, and the digitized road network, we show that input tariff declines spurred large increases in manufacturing output, firm entry, and employment, with substantially stronger effects in districts better connected to international markets. Output tariff reductions had no measurable impact. Better international access induced a sharper structural transformation within tradable sectors, with labor reallocating from agriculture to manufacturing and producer services, and increased migration from less to more internationally connected districts. We develop a quantitative spatial to understand the role of international access in the distribution of income from trade liberalization. Better international access by the median increases welfare by 9.8%. Investing in a road network targeting port connectivity significantly dampens spatial inequalities.

Recent shifts in global trade patterns have received a lot of attention, but the implications of these shifts for domestic value added in exports (DVAR) have so far been overlooked. This paper documents substantial increases in Viet Nam’s aggregate DVAR since 2018, reversing a long declining trend. Analysis using matched firm-level and customs data reveals that idiosyncratic US demand shocks had large positive effects on firm-level DVAR and output. Firms respond to the shocks by exporting more to both US and non-US markets, and their labor productivity increases, both that are consistent with the economies of scale. Firms also increase their use of domestic materials and reduce reliance on imported materials, suggesting sensitivity to implicit rules of origin. Finally, the paper highlights the role of firm ownership, with non-Chinese owned firms driving the increase in domestic value added.

This paper examines how transport and communication infrastructure expansion differentially shapes the direction of structural change in developing economies. Empirically, we study the causal impact of a rapid expansion in the roads and cellular infrastructure in India on its service-led growth. To interpret this evidence, we embed communication costs in a canonical multi-sector spatial model of trade. Quantitative estimates indicate that India's infrastructure expansion generated substantial welfare gains, accounting for 76% of the real income growth over this time period. Importantly, the gains were asymmetric: the impact from cellular network expansion was much larger than roads, highlighting the central role of communication in generating service-led structural transformation.