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Trade, firm selection, and innovation: the competition channel

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  • Giammario Impullitti
  • Omar Licandro

Abstract

The availability of rich ?rm-level data has led researchers to uncover new evidence on the effects of trade liberalization. First, trade openness forces the least productive fi?rms to exit the market; secondly, it induces surviving fi?rms to increase their innovation efforts; thirdly, it increases the degree of product market competition. In this paper, we propose a model aimed at providing a coherent interpretation of these ?ndings, and use it to asses the role of fi?rm selection in shaping the aggregate welfare gains from trade. We introduce ?firm heterogeneity into an innovation-driven growth model where incumbent fi?rms operating in oligopolistic industries perform cost-reducing innovation. In this environment, trade liberalization leads to lower markups level and dispersion, tougher fi?rm selection, and more innovation. Calibrated to match US aggregate and fi?rm-level statistics, the model predicts that moving from a 13% variable trade costs to free trade increases the stationary annual rate of productivity growth from 1:19 to 1:29% and increases welfare by about 3% of steady state consumption. Selection accounts for about 1/4th of the overall growth increase and 2/5th of the welfare gains from trade.

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Paper provided by University of Nottingham, School of Economics in its series Discussion Papers with number 13/04.

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Date of creation: Apr 2013
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Handle: RePEc:not:notecp:13/04

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Keywords: International Trade; Heterogeneous Firms; Oligopoly; Innovation; Endogenous Markups; Welfare; Competition. JEL codes: F12; F13; O31; O41;

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Citations

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Cited by:
  1. Omar Licandro & Antonio Navas Ruiz, 2010. "Trade Liberalization, Competition and Growth," Working Papers 436, Barcelona Graduate School of Economics.
  2. Pradhan, Jaya Prakash, 2011. "Regional heterogeneity and firms’ innovation: the role of regional factors in industrial R&D in India," MPRA Paper 28096, University Library of Munich, Germany.
  3. Schröder, Philipp J.H. & Sørensen, Allan, 2012. "Firm exit, technological progress and trade," European Economic Review, Elsevier, vol. 56(3), pages 579-591.
  4. Impullitti, Giammario & Irarrazabal, Alfonso A. & Opromolla, Luca David, 2013. "A theory of entry into and exit from export markets," Journal of International Economics, Elsevier, vol. 90(1), pages 75-90.
  5. Gao, Xiang, 2009. "Macroeconomic Analysis on the Basis of Trade Theory: A Review Essay," MPRA Paper 18380, University Library of Munich, Germany.
  6. Peters, Katrin & Schnitzer, Monika, 2012. "Trade liberalization and credit constraints: Why opening up may fail to promote convergence," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 380, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  7. M.A. Boermans & H.J. Roelfsema, 2013. "The Effects of Internationalization on Innovation: Firm-Level Evidence for Transition Economies," Working Papers 12-04, Utrecht School of Economics.

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