Innovation, Firm Dynamics, and International Trade
Federal Reserve Bank of Minneapolis Staff Report No. 444
Posted: 11 May 2010
There are 2 versions of this paper
Innovation, Firm Dynamics, and International Trade
Date Written: May 6, 2010
Abstract
We present a general equilibrium model of the response of firms' decisions to operate, innovate, and engage in international trade to a change in the marginal cost of international trade. We find that, although a change in trade costs can have a substantial impact on heterogeneous firms' exit, export, and process innovation decisions, the impact of changes in these decisions on welfare is largely offset by the response of product innovation. Our results suggest that microeconomic evidence on firms' responses to changes in international trade costs may not be informative about the implications of changes in these trade costs for aggregate welfare.
Keywords: innovation, firm dynamics, international trade
JEL Classification: F4, F43, F12, L11
Suggested Citation: Suggested Citation