Energy efficiency gains from importing intermediate inputs: Firm-level evidence from Indonesia

This paper investigates whether importing intermediate goods improves firm-level environmental performance in a developing country, using data from the Indonesian manufacturing sector. We build a simple theoretical model showing that trade integration of input markets entails energy efficiency improvements within importers relative to non-importers. To empirically isolate the impact of firm participation in foreign intermediate input markets we use ‘nearest neighbour’ propensity score matching and difference-in-difference techniques. Covering the period 1991–2005, we find evidence that becoming an importer of foreign intermediates boosts energy efficiency, implying beneficial effects for the environment. •Importing intermediate inputs makes firms more energy-efficient in Indonesia.•These energy efficiency gains are increasing in the number of imported input varieties.•Thus, input market integration entails relevant benefits for the environment.