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Trade and Innovation

Paper Session

Sunday, Jan. 7, 2018 8:00 AM - 10:00 AM

Marriott Philadelphia Downtown, Liberty Ballroom Salon A
Hosted By: American Economic Association
  • Chair: Ufuk Akcigit, University of Chicago

The Impact of Exports on Innovation: Theory and Evidence

Philippe Aghion
,
College of France
Antonin Bergaud
,
Paris School of Economics
Matthieu Lequien
,
Bank of France
Marc Melitz
,
Harvard University

Abstract

A simple model of trade and innovation with heterogeneous firms predicts that a positive export shock should raise innovation more for more productive firms. Two channels coexist: the innovation effort increases for all firms because the accompanying rent increases with the market size (market size effect); the innovation effort decreases because competition toughens. This competition effect is most salient for the least productive firms and dissipates with higher firm productivity. We test this prediction with patent, customs and production data covering all
French firms. To disentangle the direction of causality between innovation and export performance, we construct various firm-level export demand measures. These variables capture the extent to which a firm's foreign markets should influence its exports and through them weigh on its innovation decisions, but they are largely exogenous to firms' decisions and innovation. We show that patenting robustly increases more with demand for initially more productive firms.

Innovation and Trade Policy in a Globalized World

Ufuk Akcigit
,
University of Chicago
Sina T. Ates
,
Federal Reserve Board
Giammario Impullitti
,
University of Nottingham

Abstract

We assess the role of import tariffs and R&D subsidies as policy responses to foreign technological competition. To this end, we build a dynamic general equilibrium growth model where firm innovation shapes endogenously the dynamics of technology, and, therefore, market leadership and trade flows in a world with countries at different stages of development. The model accounts for competitive pressures exerted by both entrant and incumbent firms. Firms' R&D decisions are driven by (i) the size of the market, (ii) the effort to escape international competition, (iii)domestic and international business stealing, and (iv) technology spillovers. The theoretical investigation illustrates that, statically, globalization (defined as reduced trade barriers) benefits domestic workers with an ambiguous effect on business owners, while, dynamically, intensified globalization boosts domestic innovation through escape-competition effect. A calibrated version of the model reproduces the foreign technological catch-up the U.S. had experienced during the 1970s and early 1980s. Accounting for transitional dynamics, we show that foreign technological acceleration hurts the U.S. welfare in the short and medium run through business stealing, but generates long-run benefits via higher quality of imported goods and higher domestic innovation in the U.S. induced by escape-competition effect. The model suggests that the introduction of Research and Experimentation Tax Credit in 1981 proves to be an effective policy response to foreign competition, generating substantial welfare gains in the long run. A counterfactual exercise shows that increasing trade barriers as an alternative policy response produces gains only in the very short run, leading to large losses in the medium and long run. Protectionist measures generate large dynamic losses from trade, distorting the impact of openness on innovation incentives and productivity growth. Finally, our counterfactual exercises show that less government intervention is needed when the trade barriers are lowered as a result of globalization.

A Global View of Creative Destruction

Pete Klenow
,
Stanford University
Chang-Tai Hsieh
,
University of Chicago

Abstract

We present a model of innovation driven by creative destruction where innovation is undertaken by domestic and by foreign firms. We show how trade frictions affect the aggregate innovation rate, job flows (job creation and destruction), and entry and exit rates from exporting. We then illustrate how to infer the underlying innovation rates and trade frictions from observed data on job flows and the firm life cycle in U.S. manufacturing.

Foreign Competition and Domestic Innovation: Evidence From United States Patents

David Autor
,
Massachusetts Institute of Technology
David Dorn
,
University of Zurich
Gordon H. Hanson
,
University of California-San Diego
Gary Pisano
,
Harvard University
Pian Shu
,
Georgia Institute of Technology

Abstract

The competitive shock to the U.S. manufacturing sector spurred by rising China import competition could either catalyze or stifle innovation. Using three distinct sources of variation to identify rising trade exposure, we provide a causal analysis of the effect of surging import competition on U.S. innovative activities. Applying a novel internet-based matching algorithm to map all U.S. utility patents granted by 2013 to firm-level data, and carefully accounting for the shifting concentration of patenting activity across sectors, we document a robust, negative impact of rising Chinese competition on firm-level and technology class-level patent production. Accompanying this fall in innovation, global employment, sales, profitability, and R&D expenditure all decline within trade-exposed firms. The trade-induced contraction along all margins of adjustment and for all measures of valuation suggest that the primary response of firms to greater import competition is to scale back their global operations.
JEL Classifications
  • O3 - Innovation; Research and Development; Technological Change; Intellectual Property Rights
  • F1 - Trade