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Innovation, Trade, and Finance

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  • Peter Egger
  • Christian Keuschnigg

Abstract

This paper proposes a model where heterogeneous firms choose whether to undertake R&D or not. Innovative firms are more productive, have larger investment opportunities and lower own funds for necessary tangible continuation investments than non-innovating firms. As a result, they are financially constrained while standard firms are not. The efficiency of the financial sector and a country’s institutional quality relating to corporate finance determine the share of R&D intensive firms and their comparative advantage in producing innovative goods. We illustrate how protection, R&D subsidies, and financial sector development improve access to external finance in distinct ways, support the expansion of innovative industries, and boost national welfare. International welfare spillovers depend on the interaction between terms of trade effects and financial frictions and may be positive or negative, depending on foreign countries’ trade position.

Suggested Citation

  • Peter Egger & Christian Keuschnigg, 2011. "Innovation, Trade, and Finance," CESifo Working Paper Series 3529, CESifo.
  • Handle: RePEc:ces:ceswps:_3529
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    More about this item

    Keywords

    innovation; financial development; R&D subsidies; protection;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy

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