Working Paper: CEPR ID: DP7562
Authors: Mary Amiti; Amit Khandelwal
Abstract: How does competition affect innovation? We address this question by using a novel approach to measure quality - an important component of innovation - using highly disaggregated product data for a large set of countries. Constructing an internationally comparable measure of quality enables us to separate the effect of reducing import tariffs, our measure of competition, on quality upgrading from other country level differences in competitive environments, and product demand shocks. We base our analysis on recent theoretical frameworks that predict that the effect of competition on innovation depends on firms? proximity to the world technological frontier. As predicted by theory, we find that lower tariffs are associated with quality upgrading for products close to the world frontier; whereas lower tariffs discourage quality upgrading for varieties distant from the frontier.
Keywords: competition; growth; proximity to frontier; quality upgrading
JEL Codes: F1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Lower tariffs (F19) | Quality upgrading (for products close to the world technology frontier) (L15) |
| Lower tariffs (F19) | Discouragement of quality upgrading (for products distant from the frontier) (L15) |
| Competition (measured through import tariffs) (F14) | Quality upgrading (L15) |
| Minimum level of institutional quality (O17) | Mechanisms of the model to operate effectively (E12) |