Innovation and Trade with Heterogeneous Firms

This paper examines how trade liberalization affects the innovation incentives of firms, and what this implies for industry productivity and social welfare. For this purpose we develop a reciprocal dumping model of international trade with heterogeneous firms and endogenous R&D. We identify two effects of trade liberalization on productivity: a direct effect through changes in R&D investment, and a selection effect due to inefficient firms leaving the market. We show how these effects operate in the short run when market structure is fixed, and in the long run when market structure is endogenous. Among the robust results that hold for any market structure are that trade liberalization (i) increases (decreases) aggregate R&D for low (high) trade costs; (ii) increases expected industry productivity; and (iii) raises expected social welfare if trade costs are low.

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Year of publication:	2008
Authors:	Long, Ngo Van ; Raff, Horst ; Stähler, Frank
Publisher:	Kiel : Kiel Institute for the World Economy (IfW)
Subject:	Außenhandelsliberalisierung \| Innovation \| Produktivität \| Industrielle Forschung \| Endogener technischer Fortschritt \| Wohlfahrtseffekt \| Theorie \| international trade \| firm heterogeneity \| R&D \| productivity \| market structure

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Series:	Kiel Working Paper ; 1430
Type of publication:	Book / Working Paper
Type of publication (narrower categories):	Working Paper
Language:	English
Other identifiers:	571523293 [GVK] hdl:10419/17893 [Handle] RePEc:zbw:ifwkwp:1430 [RePEc]
Classification:	F12 - Models of Trade with Imperfect Competition and Scale Economies ; F15 - Economic Integration
Source:	EconStor