American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
A Trapped-Factors Model of Innovation
American Economic Review
vol. 103,
no. 3, May 2013
(pp. 208–13)
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.Citation
Bloom, Nicholas, Paul M. Romer, Stephen J. Terry, and John Van Reenen. 2013. "A Trapped-Factors Model of Innovation." American Economic Review, 103 (3): 208–13. DOI: 10.1257/aer.103.3.208Additional Materials
JEL Classification
- D21 Firm Behavior: Theory
- F14 Empirical Studies of Trade
- L21 Business Objectives of the Firm
- O31 Innovation and Invention: Processes and Incentives