nep-tid New Economics Papers
on Technology and Industrial Dynamics
Issue of 2013‒10‒05
three papers chosen by
Rui Baptista
Technical University of Lisbon

  1. Trade, firm selection, and innovation: the competition channel By Giammario Impullitti; Omar Licandro
  2. Financing Constraints, Firm Dynamics and Innovation By Andrea Caggese
  3. When the innovator fails to capture rents from innovation By Manuel Portugal Ferreira; Fernando Ribeiro Serra; Emerson Maccari

  1. By: Giammario Impullitti; Omar Licandro
    Abstract: The availability of rich ?rm-level data has led researchers to uncover new evidence on the effects of trade liberalization. First, trade openness forces the least productive fi?rms to exit the market; secondly, it induces surviving fi?rms to increase their innovation efforts; thirdly, it increases the degree of product market competition. In this paper, we propose a model aimed at providing a coherent interpretation of these ?ndings, and use it to asses the role of fi?rm selection in shaping the aggregate welfare gains from trade. We introduce ?firm heterogeneity into an innovation-driven growth model where incumbent fi?rms operating in oligopolistic industries perform cost-reducing innovation. In this environment, trade liberalization leads to lower markups level and dispersion, tougher fi?rm selection, and more innovation. Calibrated to match US aggregate and fi?rm-level statistics, the model predicts that moving from a 13% variable trade costs to free trade increases the stationary annual rate of productivity growth from 1:19 to 1:29% and increases welfare by about 3% of steady state consumption. Selection accounts for about 1/4th of the overall growth increase and 2/5th of the welfare gains from trade.
    Keywords: International Trade, Heterogeneous Firms, Oligopoly, Innovation, Endogenous Markups, Welfare, Competition. JEL codes: F12, F13, O31, O41
    Date: 2013–04
  2. By: Andrea Caggese (Pompeu Fabra University)
    Abstract: This paper develops the model of an industry with heterogeneous firms, and studies the effect of financing frictions and bankruptcy risk on innovation and aggregate productivity growth. The model has two main features: i) the technology of firms gradually becomes obsolete. Firms can counter this process by innovating, but the innovation outcome is risky. ii) Financial frictions cause the inefficient default of financially fragile firms, deter entry, and reduce competitive forces in the industry. I calibrate and solve the model and simulate several industries, and show that financing frictions have two distinct effects on innovation: a "direct effect", for firms that cannot innovate because of lack internal funds to invest, and an "indirect effect", where the changes in competition and profitability change also the incentives to innovate. Simulation results first show that, for realistic parameter values, the indirect effect of financing frictions is much more important than the direct effect in determining the innovation decisions. Second, they show that "Safe innovation" (where firms invest to upgrade their technology and are certain to increase their productivity) is increased by the presence of financing frictions, because the reduction in competition increases the return on innovation. Conversely "Risky innovation" (where firms invest to improve their productivity, but with some probability fail to do so and end up reducing their productivity instead), is discouraged by financing frictions. This happens because the reduction in competition implies that firms remain profitable for a longer time and therefore they wait longer before attempting a risky innovation process. I test these predictions and their implications for productivity growth on a sample of Italian manufacturing firms, and I find that the life cycle and innovation decisions of firms are fully consistent with the model with risky innovation.
    Date: 2013
  3. By: Manuel Portugal Ferreira (Instituto Politécnico de Leiria); Fernando Ribeiro Serra (Uninove – Universidade Nove de Julho); Emerson Maccari (Uninove – Universidade Nove de Julho)
    Abstract: Innovating firms face the dilemma of knowing when they will be able to appropriate the rents accruing from their innovations. Only the future value of the rents creates an incentive to innovate, and all innovations that are either imitated or improved upon by competitors preempt the innovator firms from capturing their rents. In this conceptual paper, we observe boundary conditions under which protection guarantees appropriation. A paradox emerges in that innovators benefit from networking and bandwagon effects but not from total diffusion of the knowledge. While networks are excellent vehicles for innovation, the business and social ties connecting firms deepen the hazards associated to the appropriation of rents.
    Keywords: innovation, innovation rent, network ties, diffusion of knowledge, bandwagon effects, complementary assets
    JEL: M0 M1
    Date: 2013–09–29

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