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Innovation and Trade with Heterogeneous Firms

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Author Info
Ngo Van Long
Horst Raff
Frank Stähler

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Abstract

This paper examines how trade liberalization affects the innovation incentives of firms, and what this implies for industry productivity and social welfare. For this purpose we develop a reciprocal dumping model of international trade with heterogeneous firms and endogenous R&D. We identify two effects of trade liberalization on productivity: a direct effect through changes in R&D investment, and a selection effect due to inefficient firms leaving the market. We show how these effects operate in the short run when market structure is fixed, and in the long run when market structure is endogenous. Among the robust results that hold for any market structure are that trade liberalization (i) increases (decreases) aggregate R&D for low (high) trade costs; (ii) increases expected industry productivity; and (iii) raises expected social welfare if trade costs are low

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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1430.

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Length: 28 pages
Date of creation: Jun 2008
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Handle: RePEc:kie:kieliw:1430

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Related research
Keywords: international trade; firm heterogeneity; R&D; productivity; market structure;

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Find related papers by JEL classification:
F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
F15 - International Economics - - Trade - - - Economic Integration

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Peter Friedrich & Chang Woon Nam & Janno Reiljan, 2009. "Local Fiscal Equalization in Estonia: Is a Reform Necessary?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  2. Bas Jacobs & Dirk Schindler, 2009. "On the Desirability of Taxing Capital Income to Reduce Moral Hazard in Social Insurance," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  3. Thiess Buettner & Clemens Fuest, 2009. "The Role of the Corporate Income Tax as an Automatic Stabilizer," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  4. Michael Stimmelmayr, 2009. "Wage Inequality in Germany: Disentangling Demand and Supply Effects," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  5. Hans Gersbach & Noemi Hummel, 2009. "Climate Policy and Development," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  6. Horst Raff & Joachim Wagner, 2009. "Intra-Industry Adjustment to Import Competition: Theory and Application to the German Clothing Industry," Kiel Working Papers 1557, Kiel Institute for the World Economy. [Downloadable!]
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