Kiel Working Papers, Kiel Institute for World Economics
No 1430:
Innovation and Trade with Heterogeneous Firms
Ngo Van Long, Horst Raff and Frank Stähler
Abstract: 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
Keywords: international trade, firm heterogeneity, R&D, productivity, market structure; (follow links to similar papers)
JEL-Codes: F12,; F15; (follow links to similar papers)
28 pages, June 2008
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