The Impact of Exports on Innovation: Theory and Evidence
AbstractA simple model of trade and innovation with heterogeneous firms predicts that a positive export shock should raise innovation more for more productive firms. Two channels coexist: the innovation effort increases for all firms because the accompanying rent increases with the market size (market size effect); the innovation effort decreases because competition toughens. This competition effect is most salient for the least productive firms and dissipates with higher firm productivity. We test this prediction with patent, customs and production data covering all
French firms. To disentangle the direction of causality between innovation and export performance, we construct various firm-level export demand measures. These variables capture the extent to which a firm's foreign markets should influence its exports and through them weigh on its innovation decisions, but they are largely exogenous to firms' decisions and innovation. We show that patenting robustly increases more with demand for initially more productive firms.