Innovation and Trade with Heterogeneous Firms

Authors

• Long
• N.V.
• Raff
• H.
• Stähler
• F.

Publication Date

DOI

10.1016/j.jinteco.2011.03.008

JEL Classification

Key Words

This paper examines how trade liberalization affects the innovation incentives of firms, and what this implies for industry productivity. For this purpose we develop a reciprocal dumping model of international trade with heterogeneous firms and endogenous R&D. Among the robust results that hold both in the short run when there is no entry, and in the long run under free entry are that trade liberalization increases aggregate R&D when trade costs are low and decreases R&D when trade costs are high. Expected industry productivity rises as trade costs fall.