Working Paper: NBER ID: w28945
Authors: Marc J. Melitz; Stephen J. Redding
Abstract: Two central insights from the Schumpeterian approach to innovation and growth are that the pace of innovation is endogenously determined by the expectation of future profits and that growth is inherently a process of creative destruction. As international trade is a key determinant of firm profitability and survival, it is natural to expect it to play a key role in shaping both incentives to innovate and the rate of creative destruction. In this paper, we review the theoretical and empirical literature on trade and innovation. We highlight four key mechanisms through which international trade affects endogenous innovation and growth: (i) market size; (ii) competition; (iii) comparative advantage; (iv) knowledge spillovers. Each of these mechanisms offers a potential source of dynamic welfare gains in addition to the static welfare gains from trade from conventional trade theory. Recent research has suggested that these dynamic welfare gains from trade can be substantial relative to their static counterparts. Discriminating between alternative mechanisms for these dynamic welfare gains and strengthening the evidence on their quantitative magnitude remain exciting areas of ongoing research.
Keywords: Trade; Innovation; Economic Growth; Creative Destruction
JEL Codes: F1; F43; O4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| international trade (F19) | market size (L25) |
| market size (L25) | innovation (O35) |
| international trade (F19) | innovation (O35) |
| international trade (F19) | competition (L13) |
| competition (L13) | innovation (O35) |
| international trade (F19) | specialization (Z00) |
| specialization (Z00) | innovation (O35) |
| international trade (F19) | knowledge spillovers (O36) |
| knowledge spillovers (O36) | innovation (O35) |