Exports and innovation under trade conflicts: A dynamic and heterogeneous perspective

Abstract

We build a dynamic and heterogeneous firm-level model that embodies joint decisions to export and innovate and allows both decisions to affect the firm’s production growth. We calibrate the model based on Chinese manufacturing firm data from 2005 to 2007 and find that: (1) the industry dynamics are driven by both self-selection and learning-by-exporting mechanisms, in which firms’ exports and innovation work in tandem, (2) an increasing tariff causes much a bigger negative impact than an increasing entry cost, and (3) the negative impacts of a trade conflict heavily depend on its severity as well as timing.

KEYWORDS:

• Exports
• innovation
• production
• learning-by-exporting
• trade conflicts

JEL Classifications:

• C63
• D24
• F17
• O40

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Introducing an entry cost of innovation will further contrast the group of firms innovating with the group of firms not innovating, i.e. only productive firms will innovate. However, we will later prove that the impact of production on innovation is not monotonically positive.

2 Data source: World Development Indicators database, https://data.worldbank.org/.

3 Data source: World Integrated Trade Solution, https://wits.worldbank.org/.

4 For more details on our data description and parameterization methods, please refer to Appendix 1.

5 ‘Expected innovation’ is defined in the same way as ‘expected production’: $X_t=(1-\mu {)}^{t-1}\int x\left(q\right)G\left(q\right)dq$. It is the integral of all firms’ expected innovation decision $x$.

6 A sensitivity test on the severity and timing of tariff is shown in Appendix 2, providing supplementary findings on our robustness check.

7 Total cost of production is defined as a firm’s total expenditures of its main business.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [grant number 71903188], National Social Science Fund of China [grant number 21ZD076], Research Seed Funds of School of Interdisciplinary Studies, Renmin University of China.