Innovation and Trade in the Presence of Credit Constraints

Reto Foellmi, Alexa Tiemann and Stefan Legge ()

No 10391, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper examines how trade liberalization affects investments in R&D at the firm level. In a model where entrepreneurs are heterogeneous in their wealth endowment, they rely differently on external funds. In the presence of capital market imperfections, this implies heterogeneous access to external funds such that poor entrepreneurs run smaller firms, are less likely to invest in R&D, and more likely to exit the market. Decreasing trade costs resulting from tariff reductions exacerbate these characteristics. Using firm-level panel data on seven Latin American countries for 2006 and 2010, we find support for our theoretical predictions. While recent studies emphasize a positive impact of trade liberalization on firms' productivity-enhancing activities, we provide novel evidence showing that financial constraints can impair the effect on R&D efforts. To address potential endogeneity concerns, we verify our findings using external financial dependence based on U.S. firms. These results suggest that imperfect capital markets can prevent welfare gains from trade liberalization to materialize.

Keywords: Financial constraints; Innovation; Trade liberalization (search for similar items in EconPapers)
JEL-codes: F14 O12 O16 (search for similar items in EconPapers)
Date: 2015-02
New Economics Papers: this item is included in nep-ent, nep-ino, nep-int, nep-sbm and nep-tid
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Innovation and trade in the presence of credit constraints (2021)
Working Paper: Innovation and Trade in the Presence of Credit Constraints (2015)
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