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Innovation and the Patterns of Trade: A Firm-Level Analysis

Author

Listed:
  • Santacreu, Ana Maria

    (Federal Reserve Bank of St. Louis)

  • Varela, Liliana

    (University of Warwick, CEPR and CAGE)

Abstract

This paper studies the impact of increased import penetration on a country’s long-term patterns of trade. It shows that foreign competition induces firms to increase their R&D efforts in order to differentiate their products and escape competition. Quality improvements translate into increases in firms’ exports. This effect, however, is heterogeneous across sectors and is driven by sectors’ in which the country has a comparative advantage. On the aggregate, the impact of import competition on innovation and a country’s patterns of trade depends crucially on the distribution of sectoral comparative advantage. We provide evidence of this mechanism using firm-level data on trade and innovation for France and import competition driven by China’s WTO entry.

Suggested Citation

  • Santacreu, Ana Maria & Varela, Liliana, 2019. "Innovation and the Patterns of Trade: A Firm-Level Analysis," CAGE Online Working Paper Series 404, Competitive Advantage in the Global Economy (CAGE).
  • Handle: RePEc:cge:wacage:404
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    References listed on IDEAS

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    Keywords

    quality upgrading; import competition; patterns of trade; comparative advantage JEL Classification: F12; F14; O30; O41;

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