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Trade, firm selection, and innovation: the competition channel

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  • Giammario Impullitti
  • Omar Licandro

Abstract

We study the welfare gains originating from pro-competitive effects of trade liberalization in an economy with heterogeneous firms, variable markups and endogenous growth. Variable markups arise from oligopoly trade in similar goods, and cost-reducing innovation is the engine of sustained productivity growth. Trade liberalization stiffens product market competition by reducing markups, generating tougher firm selection and increasing the aggregate productivity level. Market share reallocations triggered by selection increase firms’ incentives to innovate, thereby leading to a higher aggregate productivity growth rate. Endogenous productivity growth boosts the selection gains from trade, leading to substantial welfare improvements. A calibrated version of the model shows that growth doubles the gains from trade obtainable in models with static firm-level productivity.

Suggested Citation

  • Giammario Impullitti & Omar Licandro, 2016. "Trade, firm selection, and innovation: the competition channel," Discussion Papers 2016-05, University of Nottingham, GEP.
    • Handle: RePEc:not:notgep:16/05
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    More about this item

    Keywords

    Endogenous Growth; Heterogeneous Firms; Oligopoly; Variable Markups; Dynamic Gains from Trade.;
    All these keywords.

    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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