We investigate the effects of better access to foreign markets on innovation strategies of multiproduct firms in industries with different scope for product differentiation. Industry-specific demand and cost linkages induce a distinction between the returns to innovation. In differentiated industries, cannibalization is lower and firms invest more in product innovation. In homogeneous industries, firms internalize intra-firm spillovers and invest more in process innovation. Using firm-level data and large exchange rate devaluations, we show that better access to foreign markets increases the incentive to innovate. However, we exploit differential effects across industries and show that the innovation strategies depend on the scope of differentiation.
Flach, Lisandra, and Michael Irlacher.
"Product versus Process: Innovation Strategies of Multiproduct Firms."
American Economic Journal: Microeconomics,
Firm Behavior: Empirical Analysis
Intertemporal Firm Choice: Investment, Capacity, and Financing
Empirical Studies of Trade
Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
Industry Studies: Manufacturing: General
Industrialization; Manufacturing and Service Industries; Choice of Technology
Innovation and Invention: Processes and Incentives