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Innovation, Firm Dynamics, and International Trade

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  • Andrew Atkeson

    (UCLA, Federal Reserve Bank of Minneapolis, and NBER.)

  • Ariel Burstein

    (UCLA and NBER.)

Abstract

We present a general equilibrium model of the decisions of firms to innovate and to engage in international trade. We use the model to analyze the impact of a reduction in international trade costs on firms’ process and product innovative activity. We first show analytically that if all firms export with equal intensity, then a reduction in international trade costs has no impact at all on firms’ investments in process innovation. We then show that if only a subset of firms exports, a decline in marginal trade costs raises process innovation in exporting firms relative to that of non-exporting firms. This reallocation of process innovation reinforces existing patterns of comparative advantage, and leads to an amplified response of trade volumes and output over time. In a quantitative version of the model, we show that the increase in process innovation is largely offset by a decline in product innovation. We find that, even if process innovation is very elastic and leads to a large dynamic response of trade, output, consumption, and the firm size distribution, the dynamic welfare gains are very similar to those in a model with inelastic process innovation.

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Bibliographic Info

Paper provided by Laboratory for Macroeconomic Analysis in its series Working Papers with number WP13_2007_10.

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Length: 72 pages
Date of creation: Jan 2007
Date of revision:
Handle: RePEc:cas:wpaper:wp13_2007_10

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  1. Helpman, Elhanan & Grossman, Gene M., 1989. "Product Development and International Trade," Scholarly Articles 3445094, Harvard University Department of Economics.
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  19. J. Bradford Jensen & Andrew Bernard & Peter Schott, 2005. "Importers, Exporters, and Multinationals: A Portrait of Firms in the U.S. that Trade Goods," Working Papers 05-20, Center for Economic Studies, U.S. Census Bureau.
  20. Erzo G. J. Luttmer, 2007. "Selection, Growth, and the Size Distribution of Firms," The Quarterly Journal of Economics, MIT Press, vol. 122(3), pages 1103-1144, 08.
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