ABSTRACT
This chapter discusses the use of input material into the existing standard heterogeneous firm models. It explains how the use of input materials affects the choices to produce a certain level of product variety and quality in optimizing a firm's profit. The chapter provides evidence on the role of imported inputs on a firm's value added, product variety and product quality of one growing developing country, Indonesia. Indonesia is one of the seven gainers – countries with the increased share of value added to the total world's value added in the manufacturing sector – placing it after China, Korea and India. The chapter explains how importing and exporting firms that use imported inputs respond to tariff reductions, and how this will affect their decision in determining the optimal level of product variety and quality. It presents a theoretical framework and empirical results, and describes the estimation strategy, Indonesia's manufacturing data and data sources.
