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Trade, Firm selection, and innovation: the competition channel

Giammario Impullitti and Omar Licandro ()

UFAE and IAE Working Papers from Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC)

Abstract: The availability of rich firm-level data sets has recently led researchers to uncover new evidence on the effects of trade liberalization. First, trade openness forces the least productive firms to exit the market. Secondly, it induces surviving firms to increase their innovation efforts and thirdly, it increases the degree of product market competition. In this paper we propose a model aimed at providing a coherent interpretation of these findings. We introducing firm heterogeneity into an innovation-driven growth model, where incumbent firms operating in oligopolistic industries perform cost-reducing innovations. In this framework, trade liberalization leads to higher product market competition, lower markups and higher quantity produced. These changes in markups and quantities, in turn, promote innovation and productivity growth through a direct competition effect, based on the increase in the size of the market, and a selection effect, produced by the reallocation of resources towards more productive firms. Calibrated to match US aggregate and firm-level statistics, the model predicts that a 10 percent reduction in variable trade costs reduces markups by 1:15 percent, firm surviving probabilities by 1 percent, and induces an increase in productivity growth of about 13 percent. More than 90 percent of the trade-induced growth increase can be attributed to the selection effect.

Keywords: International Trade; Trade Liberalization; Heterogeneous Firms; Endogenous Market Structure; Productivity Growth; Endogenous Growth. (search for similar items in EconPapers)
JEL-codes: F12 F13 O31 O41 (search for similar items in EconPapers)
Pages: 37
Date: 2010-09-01
New Economics Papers: this item is included in nep-bec, nep-cse, nep-ino, nep-int and nep-tid
References: View references in EconPapers View complete reference list from CitEc
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Related works:
Journal Article: Trade, Firm Selection and Innovation: The Competition Channel (2018) Downloads
Working Paper: Trade, firm selection, and innovation: the competition channel (2016) Downloads
Working Paper: Trade, firm selection, and innovation: the competition channel (2013) Downloads
Working Paper: Trade, Firm Selection, and Innovation: the Competition Channel (2010) Downloads
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