Work

A Trapped-Factors Model of Innovation

Year: 2013

Type: article

Abstract: We explain a counterintuitive empirical finding: Firms facing more import competition do more innovation. In our model, factors are trapped inside a firm. An increase in import competition encourages a firm to innovate by reducing the opportunity cost of inputs. Without trapped factors, trade liberalization leads to a small permanent increase in the worldwide rate of growth. With trapped factors, firms that face more import competition do relatively more innovation. The extra innovation induced by trapped factors induces a small permanent increase in aggregate output, consumption, and welfare, generalizing the appropriate estimate of the gains from trade.

Source: American Economic Review

DOI: 10.1257/aer.103.3.208

Authors: Nicholas Bloom, Paul M Romer, Stephen J Terry, John Van Reenen

Institutions: National Bureau of Economic Research, Stanford University, New York University, London School of Economics and Political Science

Language: English

Topic: Global trade and economics

Subfield: General Economics, Econometrics and Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: bronze

Funder: Economic and Social Research Council