Access to New Global Markets Pushes Best Firms to Get Better
For high-productivity firms, export shocks that provide access to an expanded market lead to greater innovation, even though such shocks may also bring new competitors.
Economic theory identifies two effects of a positive export shock that increases access to new international markets. On the one hand, access to a larger market could increase a firm's incentive to innovate because larger markets promise larger innovation rents. On the other hand, the larger market could attract new entrants, increasing competition, reducing both profits and innovation rents, and thus discouraging innovation. The relative magnitudes of these effects in any given market setting is an empirical question.
Evaluating the Role of Credit Ratings in
In The Impact of Exports on Innovation: Theory and Evidence (NBER Working Paper No. 24600),
Matthieu Lequien, and
Marc J. Melitz explore this issue. They find that for high-productivity firms, those close to the productivity frontier, the positive effect of greater market size on innovation is larger than the negative competition effect. For those firms, positive export shocks are associated with an increase in the number of patent applications filed. Among less productive firms, the competition effect, which discourages innovation, appears to dominate. For these firms, positive export shocks are associated with a decline in innovation.
— Dwyer Gunn
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