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Trade, Firm Selection, and Innovation: the Competition Channel

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  • Giammario Impullitti
  • Omar Licandro

Abstract

The availability of rich rm-level data sets has recently led researchers to uncover new evidence on the eects of trade liberalization. First, trade openness forces the least productive firmto exit the market. Secondly, it induces surviving firms to increase their innovation efforts and thirdly, it increases the degree of product market competition. In this paper we propose a model aimed at providing a coherent interpretation of these findings. We introducing firm heterogeneity into an innovation-driven growth model, where incumbent firms operating in oligopolistic industries perform cost-reducing innovations. In this framework, trade liberalization leads to higher product market competition, lower markups and higher quantity produced. These changes in markups and quantities, in turn, promote innovation and productivity growth through a direct competition eect, based on the increase in the size of the market, and a selection eect, produced by the reallocation of resources towards more productive fims. Calibrated to match US aggregate and firm-level statistics, the model predicts that a 10 percent reduction in variable trade costs reduces markups by1.15 percent, firm surviving probabilities by1 percent, and induces an increase in productivity growth of about13 percent. More than 90 percent of the trade-induced growth increase can be attributed to the selection effect.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 495.

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Date of creation: Aug 2010
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Handle: RePEc:bge:wpaper:495

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Keywords: International Trade; Trade Liberalization; Heterogeneous Firms; Endogenous Market Structure; Productivity Growth; Endogenous Growth;

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Citations

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Cited by:
  1. Omar Licandro & Antonio Navas-Ruiz, 2007. "Trade liberalization, competition and growth," Economics Working Papers we076536, Universidad Carlos III, Departamento de Economía.
  2. Philipp J.H. Schröder & Allan Sørensen, 2011. "Firm Exit, Technological Progress and Trade," Economics Working Papers, School of Economics and Management, University of Aarhus 2011-17, School of Economics and Management, University of Aarhus.
  3. Impullitti, Giammario & Irarrazabal, Alfonso A. & Opromolla, Luca David, 2013. "A theory of entry into and exit from export markets," Journal of International Economics, Elsevier, vol. 90(1), pages 75-90.
  4. Gao, Xiang, 2009. "Macroeconomic Analysis on the Basis of Trade Theory: A Review Essay," MPRA Paper 18380, University Library of Munich, Germany.
  5. Pradhan, Jaya Prakash, 2011. "Regional heterogeneity and firms’ innovation: the role of regional factors in industrial R&D in India," MPRA Paper 28096, University Library of Munich, Germany.
  6. Peters, Katrin & Schnitzer, Monika, 2012. "Trade liberalization and credit constraints: Why opening up may fail to promote convergence," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 380, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  7. M.A. Boermans & H.J. Roelfsema, 2013. "The Effects of Internationalization on Innovation: Firm-Level Evidence for Transition Economies," Working Papers, Utrecht School of Economics 12-04, Utrecht School of Economics.

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