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Title

Trade, Firm selection, and innovation: the competition channel

AuthorsImpullitti, Giammario; Licandro, Omar CSIC
KeywordsInternational Trade
Trade Liberalization
Heterogeneous Firms
Endogenous Market Structure
Productivity Growth
Endogenous Growth
Issue Date1-Sep-2010
CitationUFAE and IAE Working Papers ; 841.10.
AbstractThe 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.
DescriptionJEL Classi.cation: F12, F13, O31, O41.-- Trabajo presentado a: "Kiel International Economics Meeting: Globalization, Finance and Firm Dynamics" celebrado en Alemania en 2010; "V REDg DGEM Workshop" celebrado en Madrid en 2010.
Publisher version (URL)http://pareto.uab.es/wp/2010/84110.pdf
URIhttp://hdl.handle.net/10261/35364
Appears in Collections:(IAE) Informes y documentos de trabajo

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