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A Trapped-Factors Model of Innovation

Author

Listed:
  • Nicholas Bloom
  • Paul M. Romer
  • Stephen J. Terry
  • John Van Reenen

Abstract

We explain a counterintuitive empirical finding: Firms facing more import competition do more innovation. In our model, factors are trapped inside a firm. An increase in import competition encourages a firm to innovate by reducing the opportunity cost of inputs. Without trapped factors, trade liberalization leads to a small permanent increase in the worldwide rate of growth. With trapped factors, firms that face more import competition do relatively more innovation. The extra innovation induced by trapped factors induces a small permanent increase in aggregate output, consumption, and welfare, generalizing the appropriate estimate of the gains from trade.

Suggested Citation

  • Nicholas Bloom & Paul M. Romer & Stephen J. Terry & John Van Reenen, 2013. "A Trapped-Factors Model of Innovation," American Economic Review, American Economic Association, vol. 103(3), pages 208-213, May.
  • Handle: RePEc:aea:aecrev:v:103:y:2013:i:3:p:208-13
    Note: DOI: 10.1257/aer.103.3.208
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    References listed on IDEAS

    as
    1. Philippe Aghion & Nick Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2005. "Competition and Innovation: an Inverted-U Relationship," The Quarterly Journal of Economics, Oxford University Press, vol. 120(2), pages 701-728.
    2. Francisco L. Rivera-Batiz & Luis A. Rivera-Batiz, 2018. "Economic Integration and Endogenous Growth," World Scientific Book Chapters,in: International Trade, Capital Flows and Economic Development, chapter 1, pages 3-32 World Scientific Publishing Co. Pte. Ltd..
    3. Andrew Atkeson & Ariel Tomás Burstein, 2010. "Innovation, Firm Dynamics, and International Trade," Journal of Political Economy, University of Chicago Press, vol. 118(3), pages 433-484, June.
    4. Ann Bartel & Casey Ichniowski & Kathryn Shaw, 2007. "How Does Information Technology Affect Productivity? Plant-Level Comparisons of Product Innovation, Process Improvement, and Worker Skills," The Quarterly Journal of Economics, Oxford University Press, vol. 122(4), pages 1721-1758.
    5. Charles I. Jones, 1995. "Time Series Tests of Endogenous Growth Models," The Quarterly Journal of Economics, Oxford University Press, vol. 110(2), pages 495-525.
    6. David H. Autor & David Dorn & Gordon H. Hanson, 2013. "The Geography of Trade and Technology Shocks in the United States," American Economic Review, American Economic Association, vol. 103(3), pages 220-225, May.
    7. Costas Arkolakis & Svetlana Demidova & Peter J. Klenow & Andres Rodriguez-Clare, 2008. "Endogenous Variety and the Gains from Trade," American Economic Review, American Economic Association, vol. 98(2), pages 444-450, May.
    8. Costas Arkolakis & Arnaud Costinot & Andres Rodriguez-Clare, 2012. "New Trade Models, Same Old Gains?," American Economic Review, American Economic Association, vol. 102(1), pages 94-130, February.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Levchenko, Andrei A. & Zhang, Jing, 2016. "The evolution of comparative advantage: Measurement and welfare implications," Journal of Monetary Economics, Elsevier, vol. 78(C), pages 96-111.
    2. Venturini, Francesco, 2012. "Looking into the black box of Schumpeterian growth theories: An empirical assessment of R&D races," European Economic Review, Elsevier, vol. 56(8), pages 1530-1545.
    3. YAMASHITA Nobuaki & YAMAUCHI Isamu, 2017. "Innovation Responses of Japanese Firms to Chinese Import Competition," Discussion papers 17126, Research Institute of Economy, Trade and Industry (RIETI).
    4. Giorgia Giovannetti & Marco Sanfilippo, 2016. "China’s competition and the export price strategies of developed countries," International Review of Applied Economics, Taylor & Francis Journals, vol. 30(2), pages 238-254, March.
    5. Van Reenen, John, 2011. "Wage inequality, technology and trade: 21st century evidence," Labour Economics, Elsevier, vol. 18(6), pages 730-741.
    6. Jiaochen Liang & Stephan Goetz, 2016. "Self-employment and trade shock mitigation," Small Business Economics, Springer, vol. 46(1), pages 45-56, January.
    7. repec:eee:eecrev:v:94:y:2017:i:c:p:205-220 is not listed on IDEAS
    8. repec:bla:deveco:v:55:y:2017:i:3:p:210-229 is not listed on IDEAS
    9. repec:eee:eecrev:v:98:y:2017:i:c:p:373-391 is not listed on IDEAS
    10. Jiaochen Liang & Stephan J. Goetz, 2016. "Self-employment and trade shock mitigation," Small Business Economics, Springer, vol. 46(1), pages 45-56, January.
    11. Jose Antonio Rodriguez-Lopez, 2012. "Competition and Offshoring," Working Papers 111213, University of California-Irvine, Department of Economics.

    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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