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Innovation and Trade with Heterogeneous Firms

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  • Ngo Van Long
  • Horst Raff
  • Frank Stähler

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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File URL: http://www.ifw-members.ifw-kiel.de/publications/innovation-and-trade-with-heterogeneous-firms/KWP1430.pdf
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Bibliographic Info

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
Date of revision:
Handle: RePEc:kie:kieliw:1430

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

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References

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  1. Baldwin, Richard & Robert-Nicoud, Frédéric, 2005. "Trade and Growth with Heterogeneous Firms," CEPR Discussion Papers 4965, C.E.P.R. Discussion Papers.
  2. Roberto Alvarez & Ricardo López, 2005. "Exporting and performance: evidence from Chilean plants," Canadian Journal of Economics, Canadian Economics Association, vol. 38(4), pages 1384-1400, November.
  3. James A. Brander & Paul Krugman, 1983. "A 'Reciprocal Dumping' Model of International Trade," NBER Working Papers 1194, National Bureau of Economic Research, Inc.
  4. Howitt, Peter & Griffith, Rachel & Aghion, Philippe & Blundell, Richard & Bloom, Nick, 2005. "Competition and Innovation: An Inverted-U Relationship," Scholarly Articles 4481507, Harvard University Department of Economics.
  5. Haaland, Jan I. & Kind, Hans Jarle, 2004. "R&D Policies, Trade and Process Innovation," CEPR Discussion Papers 4784, C.E.P.R. Discussion Papers.
  6. Omar Licandro & Antonio Navas-Ruiz, 2007. "Trade liberalization, competition and growth," Economics Working Papers we076536, Universidad Carlos III, Departamento de Economía.
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  8. Melitz, Marc J, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," CEPR Discussion Papers 3381, C.E.P.R. Discussion Papers.
  9. Antonio Navas-Ruiz & Davide Sala, 2007. "Technology Adoption and the Selection Effect of Trade," Economics Working Papers ECO2007/58, European University Institute.
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  28. repec:fth:bosecd:110 is not listed on IDEAS
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Citations

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Cited by:
  1. Horst Raff & Joachim Wagner, 2009. "Intra-Industry Adjustment to Import Competition: Theory and Application to the German Clothing Industry," CESifo Working Paper Series 2851, CESifo Group Munich.
  2. Eddy Bekkers & Joseph Francois, 2012. "Trade and industrial structure with large firms and heterogeneity," IIDE Discussion Papers 20121201, Institue for International and Development Economics.
  3. Dominika Langenmayr & Andreas Haufler & Christian J. Bauer, 2012. "Should tax policy favor high- or low-productivity firms?," Working Papers 130, Bavarian Graduate Program in Economics (BGPE).
  4. Antonio Navas Ruiz, 2012. "Asymmetric trade liberalization, sector heterogeneity and industry productivity growth," Working Papers. Serie AD 2012-09, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  5. Takauchi, Kazuhiro, 2012. "International R&D Rivalry with a Shipping Firm," MPRA Paper 36843, University Library of Munich, Germany.
  6. Gerda Dewit & Dermot Leahy, 2011. "Strategic Investment and the Gains from Trade," Economics, Finance and Accounting Department Working Paper Series n216-11.pdf, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  7. Navas, Antonio, 2012. "Asymmetric trade liberalization, sector heterogeneity and Innovation," Working Papers in Economic Theory 2012/05, Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History).
  8. Alfons Palangkaraya, 2013. "On the Relationship between Innovation and Export: The Case of Australian SMEs," Melbourne Institute Working Paper Series wp2013n04, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.

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