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Trade, Firm selection, and innovation: the competition channel

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  • Giammario Impullitti

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  • Omar Licandro

    ()

Abstract

The availability of rich firm-level data sets has recently led researchers to uncover new evidence on the effects of trade liberalization. First, trade openness forces the least productive firms to exit the market. Secondly, it induces surviving firms to increase their innovation efforts and thirdly, it increases the degree of product market competition. In this paper we propose a model aimed at providing a coherent interpretation of these findings. We introducing firm heterogeneity into an innovation-driven growth model, where incumbent firms operating in oligopolistic industries perform cost-reducing innovations. In this framework, trade liberalization leads to higher product market competition, lower markups and higher quantity produced. These changes in markups and quantities, in turn, promote innovation and productivity growth through a direct competition effect, based on the increase in the size of the market, and a selection effect, produced by the reallocation of resources towards more productive firms. Calibrated to match US aggregate and firm-level statistics, the model predicts that a 10 percent reduction in variable trade costs reduces markups by 1:15 percent, firm surviving probabilities by 1 percent, and induces an increase in productivity growth of about 13 percent. More than 90 percent of the trade-induced growth increase can be attributed to the selection effect.

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  • Giammario Impullitti & Omar Licandro, 2010. "Trade, Firm selection, and innovation: the competition channel," UFAE and IAE Working Papers 841.10, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  • Handle: RePEc:aub:autbar:841.10
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    Cited by:

    1. Mike Waugh & Christopher Tonetti & Jesse Perla, 2013. "Equilibrium Technology Diffusion, Trade, and Growth," 2013 Meeting Papers 484, Society for Economic Dynamics.
    2. Schröder, Philipp J.H. & Sørensen, Allan, 2012. "Firm exit, technological progress and trade," European Economic Review, Elsevier, pages 579-591.
    3. Navas Antonio & Licandro Omar, 2011. "Trade Liberalization, Competition and Growth," The B.E. Journal of Macroeconomics, De Gruyter, pages 1-28.
    4. Katrin Peters & Monika Schnitzer, 2015. "Trade liberalization and credit constraints: Why opening up may fail to promote convergence," Canadian Journal of Economics, Canadian Economics Association, vol. 48(3), pages 1099-1119, August.
    5. 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.
    6. 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.
    7. Gao, Xiang, 2009. "Macroeconomic Analysis on the Basis of Trade Theory: A Review Essay," MPRA Paper 18380, University Library of Munich, Germany.
    8. Cristiana Benedetti-Fasil & Miguel Sanchez-Martinez & Peder Christensen, 2017. "Entry barriers and their macroeconomic impact in the EU: an assessment using QUEST III," JRC Working Papers JRC108932, Joint Research Centre (Seville site).
    9. Giammario Impullitti & Richard Kneller & Danny McGowan, 2017. "Demand-driven technical change and productivity growth: Evidence from the US Energy Policy Act," Discussion Papers 2017-07, University of Nottingham, GEP.
    10. Thomas Sampson, 2014. "Dynamic Selection: An Idea Flows Theory of Entry, Trade and Growth," CEP Discussion Papers dp1288, Centre for Economic Performance, LSE.
    11. Sampson, Thomas, 2014. "Dynamic selection: an idea flows theory of entry, trade and growth," LSE Research Online Documents on Economics 60363, London School of Economics and Political Science, LSE Library.
    12. Ercan Uygur, 2014. "Some Observations on the Global Economy and ICE-TEA 2014," Ekonomi-tek - International Economics Journal, Turkish Economic Association, vol. 3(1), pages 1-12, January.
    13. Martijn Boermans & Hein Roelfsema, 2015. "The Effects of Internationalization on Innovation: Firm-Level Evidence for Transition Economies," Open Economies Review, Springer, pages 333-350.
    14. Giammario Impullitti & Richard Kneller & Danny McGowan, 2017. "Demand-driven Technical Change and Productivity Growth: Theory and Evidence from the US Energy Policy Act," Discussion Papers 2017/03, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    15. Peñasco, Cristina & del Río, Pablo & Romero-Jordán, Desiderio, 2017. "Analysing the Role of International Drivers for Eco-innovators," Journal of International Management, Elsevier, vol. 23(1), pages 56-71.

    More about this item

    Keywords

    International Trade; Trade Liberalization; Heterogeneous Firms; Endogenous Market Structure; Productivity Growth; Endogenous Growth.;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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