Innovation, Firm Dynamics, and International Trade

We present a general equilibrium model of the decisions of firms to innovate and to engage in international trade. We use the model to study the changes in aggregate productivity that arise as firms' exit, export, process- and product innovation decisions respond to a change in the marginal cost of international trade. Our central finding is that, despite the fact that a change in trade costs can have a substantial impact on heterogeneous firms' exit, export, and process innovation decisions, the impact of changes in these decisions on aggregate productivity is largely offset by the response of product innovation. Our results suggest that microeconomic evidence on individual firms' responses to changes in international trade costs may not be informative about the macroeconomic implications of changes in these trade costs for aggregate productivity.