Trade and Innovation
Publication information:
Melitz, Marc J., and Stephen J. Redding. 2023. “Trade and Innovation”. In The Economics of Creative Destruction. Harvard University Press.
Abstract
Two central insights from the Schumpeterian approach to innovation and growth are that
the pace of innovation is endogenously determined by the expectation of future prots and
that growth is inherently a process of creative destruction. As international trade is a key
determinant of rm protability and survival, it is natural to expect it to play a key role in
shaping both incentives to innovate and the rate of creative destruction. In this paper, we review
the theoretical and empirical literature on trade and innovation. We highlight four key
mechanisms through which international trade aects endogenous innovation and growth:
(i) market size; (ii) competition; (iii) comparative advantage; (iv) knowledge spillovers. Each
of these mechanisms oers a potential source of dynamic welfare gains in addition to the
static welfare gains from trade from conventional trade theory. Recent research has suggested
that these dynamic welfare gains from trade can be substantial relative to their static
counterparts. Discriminating between alternative mechanisms for these dynamic welfare
gains and strengthening the evidence on their quantitative magnitude remain exciting areas
of ongoing research.
Keywords: innovation, growth, international trade
JEL Classication: F1, F43, O3, O4
the pace of innovation is endogenously determined by the expectation of future prots and
that growth is inherently a process of creative destruction. As international trade is a key
determinant of rm protability and survival, it is natural to expect it to play a key role in
shaping both incentives to innovate and the rate of creative destruction. In this paper, we review
the theoretical and empirical literature on trade and innovation. We highlight four key
mechanisms through which international trade aects endogenous innovation and growth:
(i) market size; (ii) competition; (iii) comparative advantage; (iv) knowledge spillovers. Each
of these mechanisms oers a potential source of dynamic welfare gains in addition to the
static welfare gains from trade from conventional trade theory. Recent research has suggested
that these dynamic welfare gains from trade can be substantial relative to their static
counterparts. Discriminating between alternative mechanisms for these dynamic welfare
gains and strengthening the evidence on their quantitative magnitude remain exciting areas
of ongoing research.
Keywords: innovation, growth, international trade
JEL Classication: F1, F43, O3, O4