Asymmetric trade liberalisation, sector heterogeneity and innovation

Innovation, mark-ups and the degree of trade openness vary substantially across sectors. This paper builds a multi-sector endogenous growth model to study the in‡uence of asymmetric trade liberalisation and sectoral di¤erences in the degree of product market competition on the e¤ect that trade has on R&D investments at a …rm level. I …nd that di¤erences in the degree of competition generate large di¤erences in …rm innovative responses to trade liberalisation. A movement from autarky to free trade promotes innovation and productivity growth in those sectors which are initially less competitive. However, when the initial tari¤ level is common across sectors, a homogeneous tari¤ reduction promotes innovation in those sectors which are initially more competitive. The paper suggests that trade liberalisation could be a source of industry productivity divergence: …rms that are located in industries with greater exposure to foreign trade, invest a greater amount in R&D contributing to industry productivity growth. Finally the paper outlines the importance of reallocation e¤ects within industry and across industries that are the result of these asymmetries. An asymmetric trade liberalisation has a small but negative impact on aggregate productivity growth. Keywords: Sectorial productivity, international trade, innovation. JEL CODES: F12, O43. 1 Introduction A recent body of theoretical and empirical literature studies the in‡uence of trade openness and trade liberalisation on productivity growth. These studies explore the extent to which a larger degree of trade openness a¤ects the rate of an industry’s technological change and ultimately the evolution of TFP. To address this question, some researchers have relied on endogenous growth models with imperfect competition and product or process innovation (Rivera-Batiz and Romer (1991a)), Rivera-Batiz and Romer (1991b)), Segerstrom, Anant and Dinopoulos (1990). Peretto (2005), Licandro and Navas (2011)), and more recently, …rm heterogeneity and industry dynamics (Atkenson and Burstein (2010), Navas and Sala (2010), Long, Ra¤ and Stahler (2011), Ederignton and Mc Calman (2007), Impulliti and Licandro (2011), Gustafsson and Segerstrom (2008), Baldwin and Nicoud (2008)). These papers focus on the representative sector case, hence di¤erences among sectors and the interactions that could emerge because of these di¤erences are not explored. Empirical evidence suggests that industries are not homogenous in two dimensions that are relevant to a …rm’s investment decision to innovate: the degree of product market competition and the degree of trade openness. The former is a key determinant of innovation both in early endogenous growth models (Romer (1990), Grossman and Helpman (1991)), and more recent contributions (Peretto (1998), Aghion et al. (2001), Aghion et al. (2002)). In addition, several papers argue that trade may increase innovation e¤orts precisely through an increase in competition.1 The latter clearly a¤ects how …rms respond to trade liberalisation. Despite the relevance of these two dimensions, few papers have investigated the consequences of the existence of these asymmetries for the e¤ect that trade has on innovation. INSERT FIGURE (1) HERE The fact that industries di¤er largely in the degree of product market competition within a country is a stylized fact well documented in the data (Gri¢ th, Harrison and Simpson (2010), Eslava, Haltiwanger and Kugler (2009)). For example, Epifani and Gancia (2011) report that in the US manufacturing sector at a four-digit level of disaggregation, mark-ups vary substantially across industries. These authors observe that mark-ups vary also across countries (mark-ups are larger in poor countries) and over time. The degree of trade openness varies substantially across industries and this is the case even for developed economies. Figure (1) plots an average of trade barriers faced by di¤erent US manufacturing industries (3-digit NAICS code) during the period 1989-2005 obtained from Bernard, Jensen and Schott (2006). The …gure reveals substantial variation across industries going from 3% up to 18%. This di¤erence is even larger when we move to more disaggregated data. This paper builds a multi-sector endogenous growth model with oligopolistic competition and private R&D investments to study the e¤ects of trade openness and trade liberalisation policies on innovation and productivity growth at the industry level. The aim of this paper is to introduce asymmetries across sectors in both, the degree of product market competition and the degree 1The main mechanism through which trade has an impact on innovation in the above cited papers, is the increase in competition. This could come through di¤erent channels: An e¤ect through direct changes in the pro…tability of R&D: Peretto (2005), Licandro and Navas (2011), Rivera-Batiz and Romer (1991b) etc.., and an indirect e¤ect through selection: Competition allows only the most productive …rms to survive. The reallocation of market shares and productive resources towards the incumbents contribute to increase innovation investments. That is the case of the recent contributions with …rm heterogeneity (Atkeson and Burstein, 2008).