Giammario Impullitti

Trade, Firm Selection and Innovation: The Competition Channel

The availability of rich …rm-level data sets has recently led researchers to uncover new evidence on the eects of trade liberalization. First, trade openness forces the least produc- tive …rms to exit the market. Secondly, it induces surviving …rms to increase their innovation eorts and 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. We intro- ducing …rm heterogeneity into an innovation-driven growth model, where incumbent …rms operating in oligopolistic industries perform cost-reducing innovations. In this framework, trade liberalization leads to higher product market competition, lower markups and higher quantity produced. These changes in markups and quantities, in turn, promote innovation and productivity growth through a direct competition eect, based on the increase in the size of the market, and a selection eect, produced by the reallocation of resources towards more productive …rms. Calibrated to match US aggregate and …rm-level statistics, the model predicts that a 10 percent reduction in variable trade costs reduces markups by 1:15 percent, …rm surviving probabilities by 1 percent, and induces an increase in productivity growth of about 13 percent. More than 90 percent of the trade-induced growth increase can be attributed to the selection eect.

INTERNATIONAL COMPETITION AND U.S. R&D SUBSIDIES: A QUANTITATIVE WELFARE ANALYSIS

In the early 1970s U.S. firms were the uncontested world leaders in R&D investment in most manufacturing sectors. Later, led by Japan and Europe, foreign firms began to challenge American R&D leadership in many sectors of the economy. This period of increasing technological competition is contemporaneous with a substantial increase in U.S. R&D subsidies. What is the effect of the observed increase in international competition on U.S. welfare? How does foreign competition affect the optimal R&D subsidy in the United States, and, consequently, how far is this from the subsidy observed in the data? This article addresses these questions in a two-country quality ladder growth model.

International Competition and U.S. R&D Subsidies: A Quantitative Welfare Analysis

In the early 1970s U.S. firms were the uncontested world leaders in R&D investment in most manufacturing sectors. Later, led by Japan and Europe, foreign firms began to challenge American R&D leadership in many sectors of the economy. This period of increasing technological competition is contemporaneous with a substantial increase in U.S. R&D subsidies. What is the effect of the observed increase in international competition on U.S. welfare? How does foreign competition affect the optimal R&D subsidy in the United States, and, consequently, how far is this from the subsidy observed in the data? This article addresses these questions in a two-country quality ladder growth model.

Globalization and Wage Polarization

In the 1980s and 1990s, the U.S. labor market experienced a remarkable polarization along with fast technological catch-up as Europe and Japan improved their global innovation performance. Is foreign technological convergence an important source of wage polarization? To answer this question, we build a multicountry Schumpeterian growth model with heterogeneous workers, endogenous skill formation, and occupational choice. We show that convergence produces polarization through business stealing and increasing competition in global innovation races. Quantitative analysis shows that these channels can be important sources of U.S. polarization. Moreover, the model delivers predictions on the U.S. wealth-income ratio consistent with empirical evidence.

Global innovation races, offshoring and wage inequality

In the 1970s and 1980s the US position as the global technological leader was increasingly challenged by Japan and Europe. In those years the US skill premium and residual wage inequality increased substantially. This paper presents a two-region quality ladders model of technical change where firms from the leading region innovate in all sectors of the economy, while the lagging region progressively catches up as its firms enter global innovation races in a larger number of sectors. As the innovation gap closes, the advanced country experiences fiercer foreign technological competition which forces its firms to innovate more. Faster technical change then increases the skill premium and residual inequality. Offshoring production and innovation plays a key role in shaping the link between international competition and inequality. The quantitative analysis exploits the variation in the geographical distribution of R&D investment in OECD STAN data to construct a measure of international technological competition between the US and the rest of the world. In a calibrated version of the model, the observed increase in foreign competition experienced by US firms accounts for up to 1/6th of the surge in the US skill premium and up to one half of the increase in residual inequality between 1979 and 1995.

Trade Liberalization and State-Owned Enterprises: Evidence from Vietnam's Accession to the WTO

The findings of the new New Trade Theory are compelling and elegant, and the predictions have been justifiably held up as a watershed event in international trade. Nevertheless, the simplifying assumptions necessary to generate the results obfuscate key differences in the strategic assets firms bring to bear in lobbying national governments. In this paper, we focus on critically important subset of these assets -- firms that are owned by the government, state owned enterprises (SOEs). To do this, we study trade liberalization in Vietnam, a country transitioning from central planning, after its accession to the World Trade Organization (WTO) in 2007. Using firm-level data, we show that the productivity and size of private firms have a positive effect on tariff reduction pre- and post-accession. These findings confirm the predictions of the Melitz (2003) model regarding firm preferences in international trade negotiations. The opposite is true for state-owned firms, however, whose productivity and size lead to small tariff reductions. Further we show that tax is the mechanism through which SOEs are able to capture the government. The findings demonstrate that previous trade work has overlooked the power of SOEs in emerging markets.

Innovation and Trade Policy in a Globalized World

How do import tariffs and R&D subsidies help domestic firms compete globally? How do these policies affect aggregate growth and economic welfare? To answer these questions, we build a dynamic general equilibrium growth model where firm innovation endogenously determines the dynamics of technology, and, therefore, market leadership and trade flows, in a world with two large open economies at different stages of development. Firms’ R&D decisions are driven by (i) the defensive innovation motive, (ii) the expansionary innovation motive, and (iii) technology spillovers. The theoretical investigation illustrates that, statically, globalization (defined as reduced trade barriers) has ambiguous effects on welfare, while, dynamically, intensified globalization boosts domestic innovation through induced international competition. Accounting for transitional dynamics, we use our model for policy evaluation and compute optimal policies over different time horizons. The model suggests that the introduction of the Research and Experimentation Tax Credit in 1981 proves to be an effective policy response to foreign competition, generating substantial welfare gains in the long run. A counterfactual exercise shows that increasing tariffs as an alternative policy response improves domestic welfare only when the policymaker cares about the very short run, and only when introduced unilaterally. Tariffs generate large welfare losses in the medium and long run, or when there is retaliation by the foreign economy. Protectionist measures generate large dynamic losses by distorting the impact of openness on innovation incentives and productivity growth. Finally, our model predicts that a more globalized world entails less government intervention, thanks to innovation-stimulating effects of intensified international competition.