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A trapped-factors model of innovation

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Listed:
  • Bloom, Nicholas
  • Romer, Paul M.
  • Terry, Stephen J.
  • Van Reenen, John

Abstract

We explain a counterintuitive empirical finding: Firms facing more import competition do more innovation. In our model, factors are trapped inside a firm. An increase in import competition encourages a firm to innovate by reducing the opportunity cost of inputs. Without trapped factors, trade liberalization leads to a small permanent increase in the worldwide rate of growth. With trapped factors, firms that face more import competition do relatively more innovation. The extra innovation induced by trapped factors induces a small permanent increase in aggregate output, consumption, and welfare, generalizing the appropriate estimate of the gains from trade.

Suggested Citation

  • Bloom, Nicholas & Romer, Paul M. & Terry, Stephen J. & Van Reenen, John, 2013. "A trapped-factors model of innovation," LSE Research Online Documents on Economics 59326, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:59326
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    References listed on IDEAS

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    1. Philippe Aghion & Nick Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2005. "Competition and Innovation: an Inverted-U Relationship," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(2), pages 701-728.
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    5. Francisco L. Rivera-Batiz & Luis A. Rivera-Batiz, 2018. "Economic Integration and Endogenous Growth," World Scientific Book Chapters, in: Francisco L Rivera-Batiz & Luis A Rivera-Batiz (ed.), International Trade, Capital Flows and Economic Development, chapter 1, pages 3-32, World Scientific Publishing Co. Pte. Ltd..
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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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