A trapped-factors model of innovation

Nicholas Bloom, Paul Romer, Stephen Terry and John van Reenen

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

Abstract: We explain a counterintuitive empirical finding: Firms facing more import competition do more innovation. In our model, factors are trapped inside a firm. An increase in import competition encourages a firm to innovate by reducing the opportunity cost of inputs. Without trapped factors, trade liberalization leads to a small permanent increase in the worldwide rate of growth. With trapped factors, firms that face more import competition do relatively more innovation. The extra innovation induced by trapped factors induces a small permanent increase in aggregate output, consumption, and welfare, generalizing the appropriate estimate of the gains from trade.

JEL-codes: D21 F14 L21 O31 (search for similar items in EconPapers)
Date: 2013-05
New Economics Papers: this item is included in nep-com, nep-cse and nep-ino
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Citations: View citations in EconPapers (39)

Published in American Economic Review, May, 2013, 103(3), pp. 208-213. ISSN: 0002-8282

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http://eprints.lse.ac.uk/59326/ Open access version. (application/pdf)

Related works:
Journal Article: A Trapped-Factors Model of Innovation (2013)
Working Paper: A Trapped Factors Model of Innovation (2013)
Working Paper: A trapped factors model of innovation (2013)
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