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Innovation, Trade and Finance

  • Christian Keuschnigg

    ()

  • Peter Egger

    ()

The paper proposes a model where heterogeneous firms choose whether to undertake R&D or not. Depending on R&D choice, innovative firms are more productive, have larger investment opportunities and lower own funds than non-innovating firms. As a result, innovative firms are financially constrained while standard firms are not. The efficiency of the financial sector and a country's institutional quality relating to corporate governance determine the share of R&D intensive firms and the comparative advantage in innovative goods. We show how protection, R&D subsidies and financial development improve access to external finance in distinct ways, support the expansion of innovative industries and boost national welfare. International welfare spillovers depend on the interaction between terms of trade effects and financial frictions and may be positive or negative, depending on foreign countries' trade position.

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File URL: http://www1.vwa.unisg.ch/RePEc/usg/dp2010/DP-1008-Ke.pdf
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Paper provided by Department of Economics, University of St. Gallen in its series University of St. Gallen Department of Economics working paper series 2010 with number 2010-08.

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Length: 42 pages
Date of creation: Mar 2010
Date of revision:
Handle: RePEc:usg:dp2010:2010-08
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  1. Bronwyn H. Hall, 2002. "The Financing of Research and Development," Oxford Review of Economic Policy, Oxford University Press, vol. 18(1), pages 35-51, Spring.
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  3. Gorodnichenko, Yuriy & Schnitzer, Monika, 2013. "Financial constraints and innovation: Why poor countries don't catch up," Munich Reprints in Economics 20443, University of Munich, Department of Economics.
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  13. Aghion, Philippe & Fally, Thibault & Scarpetta, Stefano, 2007. "Credit Constraints as a Barrier to the Entry and Post-Entry Growth of Firms," IZA Discussion Papers 3237, Institute for the Study of Labor (IZA).
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  27. Bronwyn H. Hall & John van Reenen, 1999. "How Effective are Fiscal Incentives for R&D? A New Review of the Evidence," NBER Working Papers 7098, National Bureau of Economic Research, Inc.
  28. Beck, Thorsten, 2001. "Financial development and international trade : is there a link?," Policy Research Working Paper Series 2608, The World Bank.
  29. Martin Brown & Steven Ongena & Alexander Popov & Pinar Yesin, 2010. "Who Needs Credit and Who Gets Credit in Eastern Europe?," Working Papers 2010-09, Swiss National Bank.
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  35. Peter Egger & Christian Keuschnigg, 2009. "Corporate Finance and Comparative Advantage," University of St. Gallen Department of Economics working paper series 2009 2009-04, Department of Economics, University of St. Gallen.
  36. Morten Sørensen, 2007. "How Smart Is Smart Money? A Two-Sided Matching Model of Venture Capital," Journal of Finance, American Finance Association, vol. 62(6), pages 2725-2762, December.
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  41. Hall, Bronwyn & Van Reenen, John, 2000. "How effective are fiscal incentives for R&D? A review of the evidence," Research Policy, Elsevier, vol. 29(4-5), pages 449-469, April.
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