Economics presents: 

Kevin Lim, Assistant Professor of Economics, University of Toronto

Authors: Kevin Lim, Daniel Trefler, and Miaojie Yu

This paper studies the effects of trade on firm-level innovation in China. Using both econometrics and a calibrated structural model, we disentangle the mechanisms via which trade affects innovation, focusing on scale effects (impact on market size) and competition effects (impact on markups). The structural model also studies a new mechanism for competition effects: firms can escape the competition, by innovating into a market segment where competition is less intense. The econometric estimates and simulations of the calibrated structural model indicate that both scale and competition effects are important for understanding how trade affects innovation in China. In particular, when firms can innovate to escape the competition, greater competition induced by lower trade barriers can lead firms to increase innovation rather than reduce it.

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