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Trade and innovation

Marc Melitz and Stephen Redding

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Two central insights from the Schumpeterian approach to innovation and growth are that the pace of innovation is endogenously determined by the expectation of future profits and that growth is inherently a process of creative destruction. As international trade is a key determinant of firm profitability and survival, it is natural to expect it to play a key role in shaping both incentives to innovate and the rate of creative destruction. In this paper, we review the theoretical and empirical literature on trade and innovation. We highlight four key mechanisms through which international trade affects endogenous innovation and growth:(i) market size; (ii) competition; (iii) comparative advantage; (iv) knowledge spillovers. Each of these mechanisms offers a potential source of dynamic welfare gains in addition to the static welfare gains from trade from conventional trade theory. Recent research has suggested that these dynamic welfare gains from trade can be substantial relative to their static counterparts. Discriminating between alternative mechanisms for these dynamic welfare gains and strengthening the evidence on their quantitative magnitude remain exciting areas of ongoing research.

Keywords: innovation; growth; international trade (search for similar items in EconPapers)
JEL-codes: F10 F43 O30 O40 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2021-06-17
New Economics Papers: this item is included in nep-bec, nep-cse, nep-ino and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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http://eprints.lse.ac.uk/113930/ Open access version. (application/pdf)

Related works:
Working Paper: Trade and innovation (2021) Downloads
Working Paper: Trade and Innovation (2021) Downloads
Working Paper: Trade and Innovation (2021) Downloads
Working Paper: Trade and Innovation (2021) Downloads
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