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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 firm-level data sets has recently led researchers to uncover new evidence on the e€ects of trade liberalization. First, trade openness forces the least productive firmto 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 e€ect, based on the increase in the size of the market, and a selection e€ect, produced by the reallocation of resources towards more productive fims. Calibrated to match US aggregate and firm-level statistics, the model predicts that a 10 percent reduction in variable trade costs reduces markups by1.15 percent, firm surviving probabilities by1 percent, and induces an increase in productivity growth of about13 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," Working Papers 495, Barcelona Graduate School of Economics.
  • Handle: RePEc:bge:wpaper:495
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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. 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.
    4. DE LA CROIX, David & LICANDRO, Omar, 2007. "‘The child is father of the man’: implications for the demographic transition," CORE Discussion Papers 2007072, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    5. Thomas Sampson, 2014. "Dynamic Selection: An Idea Flows Theory of Entry, Trade and Growth," CEP Discussion Papers dp1288, Centre for Economic Performance, LSE.
    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, pages 75-90.
    7. Martijn Boermans & Hein Roelfsema, 2015. "The Effects of Internationalization on Innovation: Firm-Level Evidence for Transition Economies," Open Economies Review, Springer, pages 333-350.
    8. Navas Antonio & Licandro Omar, 2011. "Trade Liberalization, Competition and Growth," The B.E. Journal of Macroeconomics, De Gruyter, pages 1-28.
    9. 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.
    10. 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.
    11. 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).
    12. 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.
    13. Ercan Uygur, 2014. "Some Observations on the Global Economy and ICE-TEA 2014," Ekonomi-tek - International Economics Journal, Turkish Economic Association, pages 1-12.
    14. Peñasco, Cristina & del Río, Pablo & Romero-Jordán, Desiderio, 2017. "Analysing the Role of International Drivers for Eco-innovators," Journal of International Management, Elsevier, pages 56-71.
    15. Gao, Xiang, 2009. "Macroeconomic Analysis on the Basis of Trade Theory: A Review Essay," MPRA Paper 18380, University Library of Munich, Germany.
    16. Marta Aloi & Teresa Lloyd-Braga & Manuel Leite-Monteiro, 2017. "Welfare Benefit Reforms and Employment," CESifo Working Paper Series 6403, CESifo Group Munich.

    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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