lead to the underestimation of the positive effects of input tariff reductions for non-exporters, and overestimation of the effect for exporters.<sup>4</sup> We rely on firm-level data on 410 firms listed in the stock exchange (publicly listed firms) in nonbanking sectors in Pakistan over the period 2012-2017. Publicly listed firms are spread across 11 sectors, with a larger presence in the textile sector, and are among the largest in the economy, accounting for 13 percent of Pakistan’s GDP in 2017. We complement this data set with information on foreign ownership status at the firm level, and tariffs and FDI at sector level. We adopt a standard approach in the literature to estimate productivity and measure changes in input tariffs and upstream FDI presence. Yet, while the literature has investigated the role of upstream tariffs and FDI separately, this paper accounts for both forms of integration upstream and, at the same time, controls for output tariffs and FDI in a firm’s own sector. This allows us to isolate the effect of input tariffs from other trade liberalization reforms, and to provide a comprehensive analysis of the effect of reducing frictions in upstream markets on the performance of firms in downstream markets.

We present three main findings. First, firm-level productivity has been stagnant – indeed, firms’ average productivity has not grown since 2015. This is in line with what macro data suggest and aggregate gains have happened through a better allocation of resources. Second, we find that internationally linked firms – that is, those that are foreign-owned or exporters - perform better than domestic-owned or domestic-oriented firms. For foreign-owned firms we find suggestive evidence pointing to the productivity premium being explained both by a self-selection element – foreign investors cherry picking more productive firms, but also by foreign-owned firms increasing productivity after acquisition. For exporting firms, we find suggestive evidence pointing to the productivity premium being mostly explained by increases in productivity after starting exporting. Third, protection upstream, in the form of import duties on intermediate inputs or restrictions de jure or de facto that reduce penetration of FDI in upstream services sectors, reduces productivity downstream. These effects fall predominantly on non-exporters, relatively smaller firms, and least productive firms. As mentioned above, exporters in Pakistan are granted exemptions on duties paid on imported intermediates and capital equipment. In principle, duty-exemptions are available for exporters of any size. In practice, however, securing them is costly for firms due to administrative burdens. And since duty refunds take time to be processed, exporters face financial costs (World Bank 2019b). We provide suggestive evidence that firms who are less likely to make use of duty exemptions benefit from reduced input tariffs through both an increase in the volume and variety of imported intermediates. Our evidence on FDI in upstream service sectors is consistent with a learning mechanism where less technologically advanced firms benefit from FDI upstream through better quality, cheaper, and more varied services inputs, as well as from the technology embedded in these services. Suggestive evidence also shows a positive relationship between FDI in services and innovative activities of firms downstream, as an underlying mechanism behind the link between FDI in services upstream and productivity downstream.

> 4 Note that Amiti and Konings, (2007) find that the effect of import tariffs is stronger for importers than firms using domestic inputs only. In addition, Defever et al. (2020) show that the effect of input tariffs depends on whether inputs are imported directly or through intermediaries. Unfortunately, in our data we are not able to identify whether firms import intermediates and if they do so directly or indirectly. This would have offered another possibility to identify firms that can access duty exemptions as only direct importers in Pakistan can claim duty exemptions.

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