Innovation, firm dynamics, and international trade

Andrew Atkeson, Ariel Burstein

NBER Working Paper No. 13326
Issued in August 2007
NBER Program(s):Economic Fluctuations and Growth, International Trade and Investment, Industrial Organization, Productivity, Innovation, and Entrepreneurship

We present a general equilibrium model of the decisions of firms to innovate and to engage in international trade. We use the model to analyze the impact of a reduction in international trade costs on firms' process and product innovative activity. We first show analytically that if all firms export with equal intensity, then a reduction in international trade costs has no impact at all, in steady-state, on firms' investments in process innovation. We then show that if only a subset of firms export, a decline in marginal trade costs raises process innovation in exporting firms relative to that of non-exporting firms. This reallocation of process innovation reinforces existing patterns of comparative advantage, and leads to an amplified response of trade volumes and output over time. In a quantitative version of the model, we show that the increase in process innovation is largely offset by a decline in product innovation. We find that, even if process innovation is very elastic and leads to a large dynamic response of trade, output, consumption, and the firm size distribution, the dynamic welfare gains are very similar to those in a model with inelastic process innovation.

download in pdf format
   (521 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w13326

Published: Andrew Atkeson & Ariel Tomás Burstein, 2010. "Innovation, Firm Dynamics, and International Trade," Journal of Political Economy, University of Chicago Press, vol. 118(3), pages 433-484, 06. citation courtesy of

Users who downloaded this paper also downloaded* these:
Atkeson and Burstein w17493 Aggregate Implications of Innovation Policy
Eaton and Kortum w12385 Innovation, Diffusion, and Trade
Bernard, Jensen, Redding, and Schott w13054 Firms in International Trade
Grossman w3194 Explaining Japan's Innovation and Trade: A model of Quality Competition and Dynamic Comparive Advantage
Lileeva and Trefler w13297 Improved Access to Foreign Markets Raises Plant-Level Productivity ... for Some Plants
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us