Working Paper: NBER ID: w24600
Authors: Philippe Aghion; Antonin Bergeaud; Matthieu Lequien; Marc J. Melitz
Abstract: We analyze how demand conditions faced by a firm impacts its innovation decisions. To disentangle the direction of causality between innovation and demand conditions, we construct a firm-level export demand shock which responds to aggregate conditions in a firm’s export destinations but is exogenous to firm-level decisions. Using exhaustive data covering the French manufacturing sector, we show that French firms respond to exogenous growth shocks in their export destinations by patenting more; and that this response is entirely driven by the subset of initially more productive firms. The patent response arises 3 to 5 years after a demand shock, highlighting the time required to innovate. In contrast, the demand shock raises contemporaneous sales and employment for all firms, without any notable differences between high and low productivity firms. We show that this finding of a skewed innovation response to common demand shocks arises naturally from a model of endogenous innovation and competition with firm heterogeneity. The market size increase drives all firms to innovate more by increasing the innovation rents; yet by inducing more entry and thus more competition, it also discourages innovation by low productivity firms.
Keywords: Market Size; Innovation; Exports; Firm-Level Data
JEL Codes: D12; F13; F14; F41; O30; O47
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| export demand shock (F41) | patenting more (O34) |
| export demand shock (F41) | innovation response (O35) |
| demand shock (E00) | sales (M31) |
| demand shock (E00) | employment (J68) |
| export demand shock (F41) | innovation response for above-median productivity firms (O31) |
| increase in market size (F61) | innovation (O35) |
| competition from new entrants (L13) | discourage innovation among low productivity firms (O31) |
| positive export demand shock (F41) | increased market concentration (L11) |