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Innovation and Trade in the Presence of Credit Constraints

Listed author(s):
  • Foellmi, Reto
  • Legge, Stefan
  • Tiemann, Alexa

This paper examines how trade liberalization affects investments in R&D at the firm level. In a model where entrepreneurs are heterogeneous in their wealth endowment, they rely differently on external funds. In the presence of capital market imperfections, this implies heterogeneous access to external funds such that poor entrepreneurs run smaller firms, are less likely to invest in R&D, and more likely to exit the market. Decreasing trade costs resulting from tariff reductions exacerbate these characteristics. Using firm-level panel data on seven Latin American countries for 2006 and 2010, we find support for our theoretical predictions. While recent studies emphasize a positive impact of trade liberalization on firms' productivity-enhancing activities, we provide novel evidence showing that financial constraints can impair the effect on R&D efforts. To address potential endogeneity concerns, we verify our findings using external financial dependence based on U.S. firms. These results suggest that imperfect capital markets can prevent welfare gains from trade liberalization to materialize.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 10391.

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Date of creation: Feb 2015
Handle: RePEc:cpr:ceprdp:10391
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  1. Foellmi, Reto & Oechslin, Manuel, 2012. "Globalization and Productivity in the Developing World," Economics Working Paper Series 1203, University of St. Gallen, School of Economics and Political Science.
  2. Oded Galor & Andrew Mountford, 2004. "Trading Population for Productivity," GE, Growth, Math methods 0410001, EconWPA.
  3. Bee Yan Aw & Mark J. Roberts & Tor Winston, 2007. "Export Market Participation, Investments in R&D and Worker Training, and the Evolution of Firm Productivity," The World Economy, Wiley Blackwell, vol. 30(1), pages 83-104, January.
  4. Marc J. Melitz & Stephen J. Redding, 2014. "Missing Gains from Trade?," American Economic Review, American Economic Association, vol. 104(5), pages 317-321, May.
  5. Yuriy Gorodnichenko & Monika Schnitzer, 2013. "Financial Constraints And Innovation: Why Poor Countries Don'T Catch Up," Journal of the European Economic Association, European Economic Association, vol. 11(5), pages 1115-1152, October.
  6. Cecilia Garcia-Penalosa & Eve Caroli & Philippe Aghion, 1999. "Inequality and Economic Growth: The Perspective of the New Growth Theories," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1615-1660, December.
  7. Thorsten Beck & Asli Demirgüç-Kunt & Vojislav Maksimovic, 2005. "Financial and Legal Constraints to Growth: Does Firm Size Matter?," Journal of Finance, American Finance Association, vol. 60(1), pages 137-177, 02.
  8. Mauro Caselli, 2012. "Does wealth inequality reduce the gains from trade?," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 148(2), pages 333-356, June.
  9. Ana M. Fernandes & Caroline Paunov, 2015. "The Risks of Innovation: Are Innovating Firms Less Likely to Die?," The Review of Economics and Statistics, MIT Press, vol. 97(3), pages 638-653, July.
  10. Rajeev Dehejia & Arvind Panagariya, 2016. "The Link between Manufacturing Growth and Accelerated Services Growth in India," Economic Development and Cultural Change, University of Chicago Press, vol. 64(2), pages 221-264.
  11. Ana M. Fernandes & Caroline Paunov, 2013. "Does trade stimulate product quality upgrading?," Canadian Journal of Economics, Canadian Economics Association, vol. 46(4), pages 1232-1264, November.
  12. Foellmi, Reto & Oechslin, Manuel, 2010. "Market imperfections, wealth inequality, and the distribution of trade gains," Journal of International Economics, Elsevier, vol. 81(1), pages 15-25, May.
  13. 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.
  14. Caselli, Mauro, 2013. "Credit constraints, inequality and the growth gains from trade," Economics Letters, Elsevier, vol. 121(1), pages 43-47.
  15. Iacovone, Leonardo & Rauch, Ferdinand & Winters, L. Alan, 2013. "Trade as an engine of creative destruction: Mexican experience with Chinese competition," Journal of International Economics, Elsevier, vol. 89(2), pages 379-392.
  16. Chesnokova, Tatyana, 2007. "Immiserizing deindustrialization: A dynamic trade model with credit constraints," Journal of International Economics, Elsevier, vol. 73(2), pages 407-420, November.
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