Technology Upgrading, Exporting and Heterogeneous Firms
Stockholm University Department of Economics Research Paper No. 2010:16
30 Pages Posted: 1 Mar 2011 Last revised: 7 Apr 2011
Date Written: October 1, 2010
Abstract
Empirical evidence shows that R&D spending is highly correlated with firm productivity, highly concentrated among large firms, and responsive to trade liberalization. This paper develops a model of product upgrading with heterogeneous firms that captures these characteristics by allowing firms to choose their optimal level of fixed cost spending from a continuum. The endogenous component of fixed costs is assumed to represent R&D or product development that is spent once but reaps demand benefits over all the markets the firm serves. This mechanism encourages firms to export and capture economies of scale in fixed cost spending. The model makes two new predictions. The first prediction is that exporters upgrade while domestic firms cut costs when trade liberalizes. The second prediction is that the selection effect of trade liberalization is weaker in industries characterized by intense upgrading competition between firms.
Keywords: International Trade, Upgrading, Trade Liberalization
JEL Classification: F10, F12, O30, O31
Suggested Citation: Suggested Citation
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