The Impact of Trade Shocks on Innovation Activity in Finnish Firms

Previous international research suggests a positive association between improved access to trade market and innovation activity. This policy brief summarizes the results from the recent Finnish paper examining how firms’ innovation activity responds to product- and destination-specific export demand shocks in their export markets. I draw on unique administrative data for Finnish manufacturing firms from 1999 onwards, matched with national customs records, patent data, and innovation and R&D surveys. The analysis reveals that positive export demand shocks significantly increase patenting activity and the likelihood of introducing new product innovations, while negative shocks reduce patenting and exports. The study finds that these innovation responses are dynamic, with patent applications rising in the short term and granted patents materializing over longer horizons. Heterogeneity analysis shows that more productive and financially stronger firms benefit disproportionately from export demand expansions. This pattern suggests that financial constraints may limit the ability of firms to adopt new innovations even when export opportunities expand.