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Trade, Innovation and Productivity: A Quantitative Analysis of Europe

Aranzazu Crespo

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Process Innovation; Firm Heterogeneity; Trade Policy (search for similar items in EconPapers)
JEL-codes: F12 F13 O24 O31 (search for similar items in EconPapers)
Date: 2012-10
New Economics Papers: this item is included in nep-eff, nep-ino and nep-int
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