Trade, Innovation and Productivity: A Quantitative Analysis of Europe

Crespo, Aranzazu (2012): Trade, Innovation and Productivity: A Quantitative Analysis of Europe.

Abstract

This paper proposes a trade model with heterogeneous firms that decide not just whether and how much to export but also whether and how much to innovate. Incorporating both the extensive and intensive margins of trade and innovation leads to different possible equilibria. Depending on how costly trade is relative to innovation, medium-productivity firms may either export without innovating, innovate without exporting, do both or do neither. The impact of trade on aggregate productivity and welfare depends crucially on the equilibrium the economy is in. When lowering the variable costs of trade, the welfare effects arising from reallocating market shares across firms may be non-negligible, and when lowering the fixed cost of trade, aggregate productivity need not always increase. After calibrating the model to five European countries, we show that the different equilibria are plausible, and provide quantitative evidence that supports the predictions of our theory.

• Item Type: MPRA Paper
• Language: English
• Keywords: Process Innovation, Firm Heterogeneity, Trade Policy
• Subjects: F - International Economics > F1 - Trade > F12 - Models of Trade with Imperfect Competition and Scale Economies ; Fragmentation; F - International Economics > F1 - Trade > F13 - Trade Policy ; International Trade Organizations; O - Economic Development, Innovation, Technological Change, and Growth > O2 - Development Planning and Policy > O24 - Trade Policy ; Factor Movement Policy ; Foreign Exchange Policy; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O31 - Innovation and Invention: Processes and Incentives

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