Working Paper: NBER ID: w25228
Authors: Bettina Peters; Mark J. Roberts; Van Anh Vuong
Abstract: We study differences in the returns to R&D investment between German manufacturing firms that sell in international markets and firms that only sell in the domestic market. Using firm-level data for five high-tech manufacturing sectors, we estimate a dynamic structural model of a firm's decision to invest in R&D and use it to measure the difference in expected long-run benefit from R&D investment for exporting and domestic firms. The results show that R&D investment leads to a higher rate of product and process innovation among exporting firms and these innovations have a larger impact on productivity improvement in export market sales. As a result, exporting firms have a higher payoff from R&D investment, invest in R&D more frequently than domestic firms and, subsequently, have higher rates of productivity growth. We use the model to simulate the introduction of export and import tariffs on German exporters, and find that a twenty-percent export tariff reduces the long-run payoff to R&D by 24.2 to 46.9 percent for the median firm across the five industries. Overall, export market participation contributes significantly to the firm's return on R&D investment, which in turn, raises long run productivity and firm value providing a source of dynamic gains from trade.
Keywords: R&D investment; export market; productivity; innovation
JEL Codes: F14; L25; O3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| export tariffs (F19) | long-run payoff to R&D (O39) |
| R&D investment (O32) | product and process innovation (O31) |
| R&D investment (O32) | productivity improvements (O49) |
| export market exposure (F10) | higher payoffs from R&D investment (O39) |
| exporting firms (F10) | higher rates of productivity growth (O49) |
| export market participation (F10) | return on R&D investment (O32) |
| export market participation (F10) | long-run productivity (O49) |
| export market participation (F10) | firm value (G32) |