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International Trade and Innovation Dynamics with Endogenous Markups

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  • Cavenaile, Laurent
  • Roldan-Blanco, Pau
  • Schmitz, Tom

Abstract

Over the last decades, the United States has experienced a secular increase in market concentration and markups, as well as a doubling of the trade-to-GDP ratio. Our paper argues that these trends could be linked, pointing out an “innovation feedback effect†of trade. Lower trade costs increase innovation incentives for large global firms, and as the winners of the ensuing innovation races increase their technological advantage over global competitors and local firms, concentration and markups rise. To make this point formally, we develop a dynamic general equilibrium trade model with endogenous markups and endogenous innovation. We calibrate our model to US manufacturing data, and show that an increase in trade openness (consistent with the one observed between 1989 and 2007) increases the aggregate markup by 3.5 percentage points. This increase is entirely due to firms’ innovation response: without this response, markups would have fallen by 4 percentage points.

Suggested Citation

  • Cavenaile, Laurent & Roldan-Blanco, Pau & Schmitz, Tom, 2022. "International Trade and Innovation Dynamics with Endogenous Markups," CEPR Discussion Papers 17083, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:17083
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    1. Impullitti, Giammario & Licandro, Omar & Rendahl, Pontus, 2022. "Technology, market structure and the gains from trade," Journal of International Economics, Elsevier, vol. 135(C).

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    More about this item

    Keywords

    International trade; Markups; Innovation;
    All these keywords.

    JEL classification:

    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • F60 - International Economics - - Economic Impacts of Globalization - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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