Working Paper: CEPR ID: DP6500
Authors: Omar Licandro; Antonio Navas-Ruiz
Abstract: The aim of this paper is to understand whether international trade may enhance innovation and growth through an increase in competition. We develop a two-country endogenous growth model, both countries producing the same set of goods, with firm specific R&D and a continuum of oligopolistic sectors under Cournot competition. Since countries produce the same set of goods, trade openness makes markets more competitive, reducing prices and raising the incentives to innovate. More general, a reduction on trade barriers enhances growth by reducing domestic firms market power.
Keywords: competition; growth; R&D; trade openness
JEL Codes: F13; F43; O3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade liberalization (F13) | increased competition (L13) |
| increased competition (L13) | enhanced innovation (O36) |
| trade liberalization (F13) | enhanced innovation (O36) |
| increased competition (L13) | reduced markups (D40) |
| increased competition (L13) | market share effect (L19) |
| reduction in trade barriers (F13) | decrease in innovation (O39) |
| reduction in trade barriers (F13) | decrease in growth (O40) |