Asymmetric trade liberalization, sector heterogeneity and Innovation

Innovation, mark-ups and the degree of trade openness vary substantially across sectors. This paper builds a multi-sector endogenous growth model to study the influence that asymmetric trade liberalization and sectorial differences in the degree of product market competition has on the effect of trade openness on R&D investments at a firm level. I find that differences in the degree of competition generate large differences on firm innovative response to trade liberalization. A movement from autarky to free trade promotes innovation and productivity growth in those sectors which are initially less competitive. However, when the initial tariff level is common across sectors, a homogeneous tariff reduction promotes innovation in those sectors which are initially more competitive. The paper suggests that trade liberalization could be a source of industry productivity divergence: firms that are located in industries with greater exposure to foreign trade, invest a greater amount in R&D contributing to industry productivity growth. Finally the paper finds that these asymmetries generate important reallocative effects that contribute to enlarge these differences.