Publication

This paper examines how trade liberalization affects the innovation incentives of firms and what this implies for industry productivity and social welfare. It develops a reciprocal dumping model of international trade with heterogeneous firms and endogenous research and development (R&D). The authors identify two effects of trade liberalization on productivity: a direct effect through changes in R&D investment, and a selection effect due to inefficient firms leaving the market. They show how these effects operate in the short run when market structure is fixed, and in the long run when market structure is endogenous.