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The Heterogeneous Impact of Market Size on Innovation: Evidence from French Firm-Level Exports

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  • Philippe Aghion
  • Antonin Bergeaud
  • Matthieu Lequien
  • Marc J. Melitz

Abstract

We analyze how demand conditions faced by a firm impacts its innovation decisions. To disentangle the direction of causality between innovation and demand conditions, we construct a firm-level export demand shock which responds to aggregate conditions in a firm’s export destinations but is exogenous to firm-level decisions. Using exhaustive data covering the French manufacturing sector, we show that French firms respond to exogenous growth shocks in their export destinations by patenting more; and that this response is entirely driven by the subset of initially more productive firms. The patent response arises 3 to 5 years after a demand shock, highlighting the time required to innovate. In contrast, the demand shock raises contemporaneous sales and employment for all firms, without any notable differences between high and low productivity firms. We show that this finding of a skewed innovation response to common demand shocks arises naturally from a model of endogenous innovation and competition with firm heterogeneity. The market size increase drives all firms to innovate more by increasing the innovation rents; yet by inducing more entry and thus more competition, it also discourages innovation by low productivity firms.

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  • Philippe Aghion & Antonin Bergeaud & Matthieu Lequien & Marc J. Melitz, 2018. "The Heterogeneous Impact of Market Size on Innovation: Evidence from French Firm-Level Exports," NBER Working Papers 24600, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:24600
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    Cited by:

    1. Arnarson, Björn Thor, 2020. "The superstar and the followers: Intra-firm product complementarity in international trade," Journal of Economic Behavior & Organization, Elsevier, vol. 177(C), pages 277-304.
    2. Laura Alfaro & Alejandro Cuñat & Harald Fadinger & Yanping Liu, 2017. "The Real Exchange Rate, Innovation and Asymmetries and Hysteresis," Harvard Business School Working Papers 18-044, Harvard Business School, revised May 2018.
    3. Clément Magouyres & Thierry Mayer & Clément Mazet, 2019. "Technology-Induced Trade Shocks? Evidence from Broadband Expansion in France," Sciences Po Economics Discussion Papers 2019-10, Sciences Po Departement of Economics.
    4. Chen, Ting & Chen, Xianmeng & Wang, Cong & Xiang, Xunyong, 2018. "Export behavior and firm innovation: New method and evidence," Economics Letters, Elsevier, vol. 170(C), pages 76-78.
    5. Xavier Jaravel & Erick Sager, 2019. "What are the price effects of trade? Evidence from the US and implications for quantitative trade models," CEP Discussion Papers dp1642, Centre for Economic Performance, LSE.
    6. Alfonso Cebreros, 2019. "The Micro-economics of Export Supply: Firm-Level Evidence from Mexico," Working Papers 2019-02, Banco de México.
    7. Kyriakos Drivas & Margarita Katsimi, 2019. "Firm Heterogeneity and Exports: Stylized Facts from Greek Firms," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 47(2), pages 137-145, June.
    8. Sarah Guillou & Lionel Nesta, 2015. "Markup heterogeneity, export status ans the establishment of the euro," Sciences Po publications 2015-01, Sciences Po.
    9. Alfaro, Laura & Cunat, Alejandro & Fadinger, Harald & Yanping, Liu, 2017. "The real exchange rate, innovation and productivity," Working Papers 17-04, University of Mannheim, Department of Economics.
    10. Avi Goldfarb & Daniel Trefler, 2018. "Artificial Intelligence and International Trade," NBER Chapters, in: The Economics of Artificial Intelligence: An Agenda, pages 463-492, National Bureau of Economic Research, Inc.
    11. Marc J. Melitz, 2018. "Competitive effects of trade: theory and measurement," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 154(1), pages 1-13, February.
    12. Gigout, Timothee & Bricongne, Jean-Charles, 2019. "Explaining the Persistent Effect of Demand Uncertainty on Firm Growth," MPRA Paper 94228, University Library of Munich, Germany.
    13. Antonin Bergeaud & Yoann Potiron & Juste Raimbault, 2017. "Classifying patents based on their semantic content," PLOS ONE, Public Library of Science, vol. 12(4), pages 1-22, April.
    14. James H. Stock, 2019. "Climate Change, Climate Policy, and Economic Growth," NBER Chapters, in: NBER Macroeconomics Annual 2019, volume 34, pages 399-419, National Bureau of Economic Research, Inc.
    15. Liu, Qing & Ma, Hong, 2020. "Trade policy uncertainty and innovation: Firm level evidence from China’s WTO accession," Journal of International Economics, Elsevier, vol. 127(C).
    16. Malgouyres, Clément & Mayer, Thierry & Mazet, Clément, 2019. "Technology-induced Trade Shocks? Evidence from Broadband Expansion in France," CEPR Discussion Papers 13847, C.E.P.R. Discussion Papers.
    17. Barrows, Geoffrey & Ollivier, Hélène, 2021. "Foreign demand, developing country exports, and CO2 emissions: Firm-level evidence from India," Journal of Development Economics, Elsevier, vol. 149(C).
    18. Aquilante, Tommaso & Vendrell-Herrero, Ferran, 2019. "Bundling and exporting: evidence from German SMEs," Bank of England working papers 781, Bank of England.

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    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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